Flat budget and a full PFD would leave Alaska with $2.4 billion deficit, Legislative Finance Division says

The Alaska State Capitol
The Alaska State Capitol(KTUU)
Published: Oct. 2, 2020 at 6:21 PM AKDT
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JUNEAU, Alaska (KTUU) - The Alaska Legislature would be $2.4 billion in deficit if it chooses to pass a full statutory Permanent Fund dividend and a relatively flat operating budget, according to data from the nonpartisan Legislative Finance Division.

The House Finance Committee held a hearing on Friday to learn about the state’s revenue picture and its finances during the COVID-19 pandemic.

Dan Stickel, the chief economist with the Department of Revenue, said recent revenue forecasts for the state are largely unchanged from spring when oil prices crashed. Oil prices have gone up but production has fallen compared to projections made in April.

The result is that the state will receive a $3.1 billion Permanent Fund draw to pay for state spending in the next fiscal year and roughly $1.2 billion from all other sources.

Alexei Painter, the new head of the Legislative Finance Division, laid out the challenges facing lawmakers in January.

Without a Permanent Fund dividend, the state would have a $300 million deficit. A $1,000 dividend per eligible Alaskan would see the deficit balloon to close to $900 million. A full statutory dividend at nearly $3,100 per Alaskan would see the deficit grow to $2.4 billion.

That $2.4 billion deficit figure represents close to half of what the state spends for all services in one fiscal year.

Some legislators and prospective legislators have advocated for big budget cuts to balance the budget.

Nolan Klouda, the executive director of the University of Alaska’s Center for Economic Development, says big cuts have big consequences beyond reducing state services. “You can’t really cut government spending without cutting jobs,” he explained.

Cutting the PFD amount received by Alaskans has consequences, too. “It does seem to hurt lower-income households more because it’s a larger share of their income,” Klouda said.

There are other fiscal challenges facing the next Legislature that could cause the deficit to grow.

The current Legislature has not passed a complete capital budget for the current fiscal year, meaning more spending will be needed in January. There is also the possibility of around $50 million in supplemental spending needed for the operating budget.

A relatively mild 2020 fire season could help but the state’s election fund needs additional revenue. School enrollment is also expected to be lower due to COVID-19 which could see school districts have a shortfall in funds available.

The Alaska Marine Highway System is expected to lose $45 million over the last fiscal year and current fiscal year from a COVID-impacted revenue hit. Painter said the Legislature may need to provide additional funding to pay for vessel overhauls.

Under the statutory calculation, the Legislature is also on the hook to pay $40 million in outstanding oil tax credits in 2021 after the Alaska Supreme Court ruled a state corporation bonding plan was unconstitutional.

The state’s savings accounts are also strained.

The Permanent Fund’s Earnings Reserve Account has close to $11.2 billion available to lawmakers with a simple majority vote in both the House of Representatives and the Senate. The fund’s managers warn that overdrawing the fund beyond a rules-based formula established in 2018 would see Alaskans lose out on investment earnings to pay for state spending.

The Constitutional Budget Reserve, the state’s one significant savings account, has a balance of roughly $586 million. The fund is used for the day-to-day functioning of state government and is said to need headroom for unexpected expenditures.

Painter said the state had been using funds from the CBR before going to the Permanent Fund as leaving revenue in the Permanent Fund netted the state more in investment earnings. “It’s not that it’s unmanageable, but it’s costly,” Painter said.

The CBR has also been used consistently by lawmakers to fill budget holes, and it dropped from a balance of $15 billion five years ago.

At $1.1 billion, the Power Cost Equalization Fund is another potential source of revenue. The fund is used to help Alaskans in rural areas pay for high energy costs. Legislators have rejected using significant portions of the fund for state spending.

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