State budget problem worse than it looks, legislative analyst says

Federal pandemic relief aid, one-time funding sources - some of doubtful legal authority - and other salves to ease the state budget pain in the fiscal year that starts July 1 only mask the underlying illness, the Legislature's chief financial analyst told senators.

Filling the holes with ongoing state dollars in subsequent years - regardless of the size of the Permanent Fund dividend - could take about $250 million more than the governor proposes in his budget, Alexei Painter, director of the Legislative Finance Division, testified at the Senate Finance Committee on March 4.

To make it even worse, Painter said the Constitutional Budget Reserve Fund, which Alaska has relied upon to plug budget gaps for almost 30 years, ended the past fiscal year with less money to its name than originally projected.

The division now estimates the savings account will end this fiscal year in three months with a balance of about $500 million, close to the minimum recommended for the state's cash flow to pay bills while waiting for revenue payments to arrive.

Higher oil prices will help, adding a projected $249 million to the state treasury for the year that ends June 30, the analysts told senators. A boost in projected crude oil prices to almost $60 per barrel for the next fiscal year that starts July 1 could put close to $300 million more into the state general fund, Conor Bell, a fiscal analyst with the division, told the Senate committee.

Alaska North Slope crude was selling at around $65 on Monday, as OPEC and its allies decided last week to continue holding back oil from global markets, driving prices to their highest levels in almost two years.

However, the governor's proposal to use one-time and questionable fund sources in the Fiscal Year 2022 budget would negate much of the gain from higher oil prices if lawmakers back out those revenues to look at a truer budget picture, Painter explained.

Federal COVID-19 relief money is helping to fund the transportation and Medicaid budgets, he said.

The chief fiscal analyst said the governor's proposal to use money from the Alaska Industrial Development and Export Authority to cover the state's $60 million obligation to pay oil tax credits next year exceeds that agency's statutory authority, as does designating $4 million of higher education funds to pay for housing to aid in recruiting prosecuting attorneys for rural communities.

Separate from trying to cover public services and the rest of the state budget as have governors before him, Gov. Mike Dunleavy proposes that legislators withdraw additional money from the Permanent Fund earnings reserve to pay much larger dividends to Alaskans this year and in future years.

Under his plan for bigger dividends than in the past five years, the governor acknowledges a large budget gap, explaining that "other revenue sources" will be needed to pay the bills for public services, at least $1.2 billion in Fiscal Year 2023.

The governor has not proposed any substantial new revenues and opposes any new taxes unless Alaskans are given a say in tax decisions in a constitutional amendment he wants on the ballot next year.

Drawing on Permanent Fund earnings to balance the budget for public services is the most likely answer, Dunleavy's revenue commissioner told the House Finance Committee on March 2. "I guess what that means is that we would just be spending into the ERA (Permanent Fund earnings reserve account) to fund any deficit balances in the future," Commissioner Lucinda Mahoney said.

"Time is running out," Senate Finance Co-Chair Bert Stedman, of Sitka, said at his committee's March 4 meeting. The longer it takes to adopt a sustainable, long-term fiscal plan for the state, the more the Permanent Fund and the annual dividends are at risk.

The Legislative Finance Division analysis charts out that if lawmakers accept Dunleavy's plan for larger dividends, do not adopt any new taxes, and the one-time funding sources go away, the heavy draws on the Permanent Fund earnings would deplete the reserve account and end the annual dividends by 2027.

Using one-time money to help pay for public services is not sustainable "and the hole will get bigger," Stedman said. Even with more federal aid coming to the state in pandemic-relief legislation, that, too, will go away in a year or two and the problem will be worse, the senator said.

While covering spending in the short term, taking additional money out of the Permanent Fund earnings account would reduce the fund's investment earnings long term, Stedman said, cutting into future state revenues.

The governor's plan of additional draws on the Permanent Fund is not viable, said Sen. Natasha von Imhof, a member of the finance committee.

In addition to jeopardizing the fund, the lack of a sustainable budget plan has resulted in "anemic" public works budgets in recent years, she said. The public works, or capital budget, helps pay for maintenance on state, municipal, school and university buildings, roads, harbors and other facilities, plus new construction.

Statewide, deferred maintenance needs total about $2 billion, the Legislative Finance Division told the Senate committee. The governor's capital budget proposes spending $51 million for the fiscal year that starts July 1.

In addition, the state's share of major maintenance projects at local schools totals $350 million.


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