The state was already looking at deficit spending even before Wednesday’s revenue forecast came out, but now Alaska is facing a $2 billion budget shortfall. The governor also wants to put $3 billion toward paying off the state’s unfunded pension liabilities. Lawmakers plan to cover the gap with a mix of cuts and savings withdrawals.
With Gov. Sean Parnell’s budget due out next week, there’s plenty of speculation over what exactly will be in it. The safest guess seems to be red ink.
“I think that you will see reductions in all components of the budget,” says Karen Rehfeld, director of the Office of Management and Budget.
Rehfeld’s staff is now putting the finishing touches on the document. She says they’ve been scrutinizing agency costs and prioritizing capital projects that are already in the works instead of starting new ones. The goal is to spend less than last year.
But there is one spot where the governor would like to invest a lot of money. He wants to move $3 billion from the state’s budget reserves into the retirement trust funds as a way of shrinking the cost of Alaska’s pension system down the road.
“The unfunded liability and the payment that we make on behalf of governments and school districts really is the single largest operating budget cost driver we have.”
So, with a $2 billion shortfall, $3 billion toward unfunded liabilities, and a lot of mega-projects in the works, that doesn’t leave the Legislature with much wiggle room in adjusting the budget.
Fairbanks Republican Pete Kelly co-chairs the Senate’s finance committee, and he says legislators are still figuring out how much of their own cuts they want to make and how much they want to pull from savings. He says some draws on the state’s reserves are inevitable.
“Well, you know, you’re going to have to have some savings withdrawal. There’s no question. You can’t make up that kind of a shortfall in one chunk. That would throw the state into a serious mess, and we don’t need to complicate our economic picture right now by just drastic government reductions and layoffs that would come from that.”
Kelly says he would like those withdrawals to come from the state’s $12-billion constitutional budget reserves fund, which requires approval from three-quarters of the Legislature. The Legislature would not need a supermajority if they wanted to pull from the $5 billion in the statutory budget reserve account.
In terms of cuts, Kelly’s preference is to focus on operating costs before scaling back on capital projects. He says the state still has an obligation to put money toward developing a gasline, even if it means voting to use the state’s constitutional budget reserves. But he thinks there are other major projects, like the Susitna Hydro project, that could be dialed back.
“The other projects like Susitna, I don’t know,” says Kelly. “I don’t know how full speed ahead we need to go on that.”
There’s some agreement from Democrats on that front. Anchorage Democrat Les Gara serves on the House Finance Committee, and he says that while the state should keep working toward a gas project, other big-ticket items like the proposed Knik Arm Bridge shouldn’t get funding when the state’s in belt-tightening mode. Instead, Gara thinks state revenue should first be spent on things like schools and staffing the Office of Children’s Services.
Gara thinks the governor is responsible for the current fiscal situation. He says that Parnell committed to too many expensive projects in the past, and that the problem has been compounded by the oil tax overhaul that the administration pushed for.
“He can’t keep spending money on everything in the world,” says Gara. “We need to spend things on core services, like improving education instead of damaging it like he’s done the last three years.”
No matter what, some choices will have to be made on where to pull back. The state has a good cushion — about $17 billion in savings — but that can only last so long unless revenue prospects look better. OMB Director Karen Rehfeld is optimistic that will happen under the new tax law and that oil production will turn around. She thinks that Alaska can improve its budget outlook before lawmakers have to consider other sources of revenue, like an income tax or using the Permanent Fund as a back stop.
“Before we have those conversations, Alaskans really have to be comfortable with what services they expect government to provide and how much state funding they believe should be available to communities and community projects,” says Rehfeld.
And that’s expected to spark some hard conversations in their own right.