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Legislative Finance Director on Budget Shortfall: ‘I Don’t Believe Crisis is Too Strong a Word.’

Photo by Chris Potter, ccPix.com, Creative Commons Licensing.

On Friday, Legislative Finance Director David Teal emphasized the dire nature of the State’s fiscal situation and told the legislature’s finance committees that Gov. Bill Walker’s Fiscal Year 2018 budget is artificially small.

In a detailed budget overview published earlier this month, the Legislative Finance Division noted that if the legislature merely uses savings again to fill the budget gap, there will not be enough left in the Constitutional Budget Reserve (CBR) account for FY 2019.

If the legislature were to then tap the Earnings Reserve Account (ERA) of the Permanent Fund, that account would be exhausted after FY 2024, eliminating the source of Permanent Fund dividends (PFDs) and leaving the State with no available savings.

“I don’t believe that ‘crisis’ is too strong a word to use to describe our fiscal situation,” Teal, the legislature’s budget expert, told Senate Finance during a hearing Friday.

What Teal called “structural deficits” of over $2 billion are projected to continue through at least FY 2026 due to low oil prices.

“These are not just small deficits of the type where you get to the end of the year and your forecast was slightly off and you’re two percent low on your funding; these are mostly fiscal gaps that we know about in advance as we prepare the budget,” said Teal. “We continue to struggle with these deficits despite the massive spending reductions.”

FY 2018 will be the sixth straight year that the State has had a budget deficit, even though the budget has been cut over $4 billion, Teal showed in a presentation.

Legislative Finance calculates the deficit at $2.75 billion.

To address this, Walker has reintroduced the Permanent Fund Protection Act, which would use 5.25 percent of the average value of the Permanent Fund over five years. The so-called percent-of-market-value (POMV) draw is designed to allow the ERA to recover through standard investment interest.

Legislative Finance says that the bill would “radically reduce Alaska’s fiscal deficits,” supplying $2.5 billion for the budget, $700 million of which would fund a $1,000 PFD.

The FY 2018 deficit would drop to $875 million.

“That is a huge deficit, with revenue covering less than 85% of expenditures,” Legislative Finance acknowledges. “It is, however, a huge improvement from the $3 billion to $4 billion deficits of the past three years.”

Walker has requested that a $2.5 billion POMV draw also be made for the FY 2017 budget passed last year, which would keep $2.5 billion in the CBR used to fill this year’s deficit.

“I’ve had many questions on this, mostly along the lines of, ‘He can’t do that! How can he do that?’ And of course he can request it. It doesn’t mean you have to do it,” Teal told senators, “but there’s nothing illegal in any way about requesting a supplemental appropriation.”

Walker’s bill passed the Senate last year, 14-5, but the House Finance Committee voted to kill it.

Sen. Cathy Giessel (R-Anchorage), who voted for the bill last year, reiterated her support Friday on the Senate floor.

“I still support the concept embodied in that legislation that we passed last year,” she said during Special Orders. “The Permanent Fund earnings was intended to meet the State’s needs on rainy days. I would submit… we are in just the circumstances envisioned by the craftsmen that put together the Permanent Fund and the dividend program.

“If last year was the rainy season, this year is flood season,” Giessel continued. “Without a flood control program, the State budget will wash out the banks and, along with it, the dividends of every Alaskan.”

Director Teal: Budget Must Now Reflect PFD as Part of Spending Totals

The deficit is calculated using the difference between unrestricted revenue and unrestricted general fund (UGF) spending, the appropriations the legislature can make for any purpose.

Other funds the legislature targets for a specific purpose are called designated general funds (DGF). For example, Teal said the largest source of DGF is tuition paid to the University of Alaska, the spending of which is tied to the university.

“I’m not sure how students would respond to the legislature taking university tuition and spending it for ferry operations in Southeast Alaska. You could do that, but designated funds are often designated for a reason,” Teal told Senate Finance members.

Though the Permanent Fund is a dedicated fund, the Alaska Supreme Court has said the ERA is available for appropriation, suggesting it is UGF. Yet the account has remained “off budget.”

Classifying the $8 billion ERA as UGF is problematic because it shows as available revenue, said Teal.

“Legislators, the public, anyone just looking at the numbers would say, ‘So what’s the problem? You’ve got $10 billion in revenue and a $5 billion budget.’ So it would be very distorting to draw up budget documents that showed you with massive surpluses every year,” he explained.

“Thinking you have a surplus could affect the attitudes in the [Capitol] about spending,” Teal told House Finance.

Consequently, ERA expenditures, including PFDs, “have been reported, but not rolled into any totals,” Teal said.

However, Walker’s FY 2018 budget shows that he intends to make the POMV payout from the ERA available for UGF spending. PFDs would then be paid from UGF.

“The Governor’s plan to include some Permanent Fund earnings in unrestricted general fund revenue is not only a radical departure from past practice, it literally changes history,” the Legislative Finance Division writes.

Office of Management and Budget Director Pat Pitney, the budget expert for the executive branch, acknowledged the change in Friday’s House Finance hearing, but she did not elaborate on the new accounting.

Since Walker does not include inflation-proofing of the Permanent Fund in his budget, it is now clear that ERA expenditures are not DGF spending, but rather UGF spending, said Teal.

“Under the governor’s budget, it’s unavoidable to make that reclassification,” he said.

Therefore, the Legislative Finance Division has added the PFD into the budget totals. The FY 2017 and FY 2018 budgets now reflect $5 billion in UGF spending, instead of$4.3 billion.

Whether $4.3 Billion or $5 Billion, Budget and Deficit Artificially Small

On paper, Walker’s budget is about $40 million less than FY 2017, but Teal pointed out that there are some omissions from the budget that will likely cause the total to increase.

Walker did not include $30 million for Community Assistance, formerly known as Community Revenue Sharing. Senate Finance hammered the Walker Administration for the omission on Wednesday.

Pitney assured the committee the administration intends to submit the $30 million as a supplemental next year, but Teal said if the legislature does not add it this year, small communities will be forced to budget as if the money will not be received.

The proposed FY 2018 budget does not include $21 million for university and K-12 school capital projects and deferred maintenance. It also underfunds K-12 student transportation by $6 million, the amount that Walker vetoed from the FY 2017 budget.

“It is unclear at this time whether excluding funding for schools and the University is a reflection of sufficient available balances and/or project management limitations, or due to pressure to submit a total budget smaller than the FY17 budget,” Legislative Finance wrote.

Following the lead of the last legislature, Walker proposes to tap the Alaska Higher Education Investment Fund to pay $58 million toward public employee retirement. He also proposes to use the Fund to pay for school broadband access grants and the multi-state agreement with the University of Washington School of Medicine known as WWAMI.

The Higher Education Investment Fund is DGF designed to support the popular Alaska Performance Scholarship and Alaska Education Grant.

Last year, the Senate Finance Committee attempted to eliminate the scholarships and grants through last-minute legislation, but public outcry killed the bill.

“Use of the Alaska Higher Education Investment Fund for purposes not designated in statute will endanger the ability of the fund to pay for grants and scholarships,” Legislative Finance warns. “If the FY18 Governor’s request is approved, the end-of-year balance will fall to an estimated $284.2 million, after investment returns. This balance is not sufficient to sustainably pay for the designated programs, let alone the other non-designated uses of the fund.”

Finally, Walker’s budget assumes passage of a motor fuel tax he reintroduced. If that does not pass, it leaves a $70 million hole in UGF.

In total, Legislative Finance estimates that there is a $180 million difference between Walker’s budget figures and what the legislature is likely to add. If they agree, the budget will grow to $5.25 billion.

That would also bring the true deficit to over $1 billion with Walker’s Permanent Fund bill or about $3 billion without it.

Teal will be back in front of Senate Finance on Monday to discuss the intent language proposed in the budget.

Monday will also see the new legislature’s first bill hearing. The House Judiciary Committee is scheduled to consider Rep. Tammie Wilson’s (R-North Pole) bill on the seizure or forfeiture of property related to criminal prosecution.