In the above chart included in a Legislative Finance Division report from July, cuts to state operating budgets have dropped it back to 2007 levels. Despite these reductions, a sharp decline in revenues means only around a quarter to a third of the budget has been fully funded since 2015.
Stopping in town one last time before next week's election, Sen. Bert Stedman talked about the state's ongoing deficit woes, by far the largest issue the new set of legislators will be facing when they head into next year's session.
Speaking on October 27, he tried to put the scale of the deficit into perspective. While for readability's sake the amount is sometimes expressed in terms of "billions," he noted the full figure may come to between $3,100,000,000 and $3,500,000,000 this year – an awful lot of zeroes to consider. By the lower estimate, that amounts to around $100 spent per second not being covered by revenues.
The Legislative Finance Division estimated in a report last summer, revenue for the state each of the past two years will have diminished to the point where under 30 percent of operating budgets are covered. Revenues started tumbling in the 2013 Fiscal Year (FY13), from a high point the previous year of $9.5 billion to $6.9 billion. From there began a progressive slide: to $5.4 billion in FY14, $2.3 billion in FY15, $1.3 billion in FY16, and now an expected $1.2 billion for this year.
During the surplus years, state budgets had climbed to a high of $7.8 billion for FY13, even as revenues had begun their downward dive. As it became apparent the oil prices state revenues largely depended on were tumbling for an extended period, legislators tried to keep pace with cuts to the budget. First the capital budget for FY14 was cut by nearly 60 percent from the previous year, though an increase in statewide items and agency operations kept overall cuts to only 22 percent. Since the start of FY14, all expenditures have been reduced by about 42 percent.
Further cuts in following years ended up reducing the budget to its lowest point since FY07, but revenues continued declining well ahead of that. The difference had to be paid using the Legislature's designated reserve accounts, the balances of which had fortunately grown along with revenue surpluses in preceding years.
The Statutory Budget Reserve and Constitutional Budget Reserve funds together stood at $16.3 billion by July 2013, but subsequent withdrawals due to deficit spending have since drawn them down to an expected $3.6 billion by the end of this fiscal year, next June.
"I expect the governor to put a budget on the table the 15th of December with a deficit range of $3.3 to $3.5-billion," said Stedman. If that is the case, and without any new sources of revenue, both reserve accounts may be exhausted by the end of FY18.
"For all practical purposes the savings accounts are gone. They're zeroed out. And that doesn't pay off the $1.2 billion in credits we owe," Stedman explained, referring to deferred oil and gas tax credits still owed to producers.
"So the inaction by the Legislature is making the situation worse, not better. We've reduced the operating budget the last couple of years, but we can't reduce it fast enough to fix the problem," he said.
Gov. Bill Walker put forward a package of items for new revenue sources to consider this year, but the State Legislature had not taken action on them by the end of its last special session. In June he had as a result vetoed $1,290,000,000 from the draft budget legislators had put forward. Perhaps most acutely felt by residents, $666,350,000 of this was cut from the annual Permanent Fund Dividend, with the undistributed amount remaining in its earnings reserve account (ERA). As a result, PFD payments were capped to just over $1,000 this year. The ERA will subsequently have grown from $7.3- to $9.2-billion by the end of this year, with that money remaining in reserve.
Among items legislators are expected to look into this next session is a reframing of the Permanent Fund, valued now at $54,460,600,000. Currently 30 percent of petroleum royalties collected by the state go into the fund, from which a statutory net income is drawn for the ERA, going then from there to pay out annual dividends. To inflation-proof the reserve, a portion of the ERA goes back to the fund principal. On average, the Permanent Fund has grown by 3.2 percent each year since 1977.
A plan put forward for consideration to restructure the fund would set it up instead as a sovereign wealth fund, whereby half of petroleum royalties would go into the fund principal along with all production taxes. Earnings from the fund would then go into the ERA, which would in turn be used to help pay for budget expenditures. A "dividend" would still exist, funded instead directly through the other half of state petroleum royalties.
There are differing methods on how to best allot funds from the Permanent Fund to the ERA, such as drawing a fixed dollar amount or having a statutory percent of market value approach. Of these, Stedman pointed out his long-standing support for the latter approach, which he points out has worked for Sitka. A 4.5- or 5-percent rate would be manageable, in his view, which would be sustainable for the fund and would allow for its continued availability for future generations of Alaskans. This rate is in line with the LFD assessment, which recommended a 4.5-percent rate for an annual appropriation of $2.4 billion between 2019 and 2045, with some assumptions.
Additional revenue for government spending would come from other taxes, which will be part of the coming political discussion. In conjunction with changes in revenue sourcing, Stedman favors continued reductions to the operating budget over a four- or five-year period. If the budget were cut at once to meet available revenue, he noted the government would only have enough to finance K-12 education.
"That's not a solution, that's just rhetoric," he said. "A lot of the positions that have been eliminated were positions that were never filled. There are more efficiencies that can come. There is not a lot of excess fat, so now we're going to be cutting into the bone, I guess. We don't have any choice."
He noted cuts could be more equitably made than they have been so far, citing as an example cuts to the Marine Highway System. Alaska's ferry budget has been reduced by 36 percent since FY14, which Stedman compared to the 17-percent cut for other Department of Transportation programs.
"The reason is it's a coastal issue, and coastal Alaska has basically been outvoted within the Legislautre, due to our fracture of R&D composition ... and our population concentration in Anchorage, Mat-Su and Fairbanks. And when you put those two together it's deadly."
If reelected, Stedman hoped to see other coastal Republicans elected to the House in order to better place the region within the legislative majorities.
"So the sooner we take action and put together a solution, the better it will be for the state. And then we can come back in future years – the following year, and the year after that – and adjust it as we try to work our way through this mess," he said.
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