Day 64: 'It all has to pencil out'

The budget, dividends and current-year deficits.

Good afternoon, Alaska! It’s day 64 of the legislative session.

In this edition: Several pieces of the state’s financial picture came into sharper focus today as the Senate Finance Committee held its first hearing on a new dividend structure, the House Majority conceded that the full dividend they fought for as members of the minority isn’t exactly realistic and the state got a dose of cold water with the release of the spring revenue forecast. But before legislators can really dig into the future of the dividend, they’ll have the pressing problem of a deficit in the current budget year and face some potentially tricky negotiations.

Current mood: 📉

‘It all has to pencil out’

It’s been a busy day, so let’s start with the most recent news: The Alaska Department of Revenue released its updated spring revenue forecast this afternoon, painting—as everyone expected it would be—a bleaker financial picture for the state. Largely a result of cooling oil prices, in big numbers it forecasts $246 million less revenue in the current budget year and $679 million less for the next budget year than when we expected at our last check-in in the fall.

That translates to a deficit of roughly $220 million in the current budget year (completely eliminating forward funding for K-12 education, in case you were still keeping track of that) and ballooning the deficit in the governor’s proposed budget for next year to just north of $900 million.

The big caveat when we talk about deficits in proposed budgets is that they are, of course, proposed. The governor hasn’t proposed any sort of big-ticket education funding in his budget, so the size of the deficit doesn’t take into account the extra money that’s likely to pass this session… probably. The governor’s budget does, however, propose a PFD according to the statutory formula that was long ago abandoned by the Alaska Legislature, a nearly $2.5 billion spend.

We’ll get a better look at the revenue forecast when the Department of Revenue gives its presentations to the Senate and House finance committees on Wednesday.

The dividend

The dividend was, fittingly, the other big story line of the day as the Senate rolled out its proposal to finally get around to updating the long-ignored laws governing the size of the dividend. The proposal is pretty straight-forward: 75% of the spendable revenue from the Alaska Permanent Fund would go to the state’s treasury and 25% would go to dividends. According to the Legislative Finance Division projections, dividends would sit start at roughly $1,300 and grow to about $1,600 over the next decade. The state’s financial picture would also stabilize almost immediately, according to modelling by the Legislative Finance Division, and we’d see deficits disappear.

“The most important thing to see here is that it’s green,” Ken Alper, legislative aide to Senate Finance Committee co-Chair Sen. Donny Olson, while presenting the slide above during the hearing today and pointing out it shows no deficits or overdraws on the Alaska Permanent Fund over the next decade.

Stability seems to be the name of the game with the Senate’s plan here. The modeling done so far on a 75-25 split are, perhaps unsurprisingly, the most stable for the overall state’s financial picture. By avoiding deficits, you also avoid the politically expedient solution of spending down the state’s savings accounts in the name of putting off tough decisions. Alper also noted that the Legislature would be free to add in additional money to a payout or energy rebate if they had the money in future years.

Of course, the Senate Finance Committee is not the only player at the table. This legislation would also need to go through the House—which seems to have conceded that paying out a big dividend is, in fact, hard when it introduced a budget Monday that pulled back on the size of the dividend—and Gov. Mike Dunleavy.

As was pointed out several times throughout the day by senators: Even a pretty significant reduction to the dividend, as the Republican-led House Majority proposes in its new budget, isn’t enough to close the deficit created by the revised forecast. The House is going with a 50-50 split that would cut spending on the dividend by about $700 million, which would still leave the state with a significant deficit and no extra education funding.

Asked about it at a news conference prior to the release of the revenue forecast, House Finance Committee co-Chair Rep. DeLena Johnson said she was focusing on landing a balanced budget with the information available at the moment, but conceded that the revised revenue forecast would require “a whole lot of other decisions to be made.”

When asked if she would be willing to go lower on the dividend amount, Johnson said she would rather stay at 50-50 but seemed to concede that it could change if it must.

When given asked for their individual positions on the size of the dividend, only Fairbanks Republican Rep. Frank Tomaszewski, a freshman, spoke up. He said it was time for the dividend to stop being a “political football” and for the state to achieve some measure of budgetary stability. The silence from the rest was palpable.

For those who’ve been watching the state’s financial woes unfold over the past decade, the Republican-led House Majority’s shift in position on the dividend was pretty remarkable. This is a group of legislators who, while in the minority, have been the biggest single legislative impediment to any meaningful resolution of the dividend and the state’s overall financial picture. They’ve nearly pushed the state to the financial brink several times, including several potential shutdowns, and found plenty of political success in making promises about big PFDs and painless cuts.

Man, the responsibility of being in a majority comes at you fast.

Reframing the conversation

The Senate Finance Committee’s hearing on its PFD bill sparked a fair bit of big-picture talk, but the most interesting comments came from Bethel Sen. Lyman Hoffman. Hoffman, in recent years, has shifted more in support of larger dividends and said he doesn’t want them to lose sight of the possibility of paying out a larger dividend. He suggested that they essentially revisit the dividend proposal the Senate put forward last year where they would start out at the 75-25 split and then move toward a 50-50 split as additional revenues come online.

Hoffman said it’d make an important difference in the kind of conversations legislators would have on the campaign trail. You couldn’t just say you’re in favor of a big dividend, Hoffman said, and instead you’d need to talk about what kind of revenues you support in service of a larger dividend. He said that kind of approach would force everyone to look more seriously at the state’s financial picture and potentially bring a durable solution to the problem, but stressed that it “all has to pencil out.”

“I understand that a 50-50 today does not work. … But knowing the politics in this building as well as the average person, we need to come up with something that works for the people of Alaska, the people at this table, the other body and the Third Floor,” he said. “What I’m saying is in order to accomplish a 50-50, the hard decisions are additional revenue in order to get this split done. I’m ready, willing and able to make those tough decisions and I hope all of my colleagues at this table are also willing to make those tough financial decisions. That’s what we’re here for."

A more pressing problem

Legislators will likely face a more immediate question than the size of the dividend, though, because the revised revenue forecast also grows the deficit in the current budget year. Where that might not have been a problem in past years, it’s a big problem this year because the state doesn’t have the backstop in place to cover unexpected deficits.

The go-to deficit filler is typically the state’s Constitutional Budget Reserve, which requires a high bar of a three-quarter vote in both chambers to tap (this is also where the reverse sweep happens, if you were wondering). It shouldn’t come as a surprise to find out we’ve been flying without the CBR as a safety net thanks in part to the legislators who are now part of the House Majority, who turned it into leverage.

When asked about the current year’s deficit today, House Speaker Cathy Tilton said the preferred avenue would be a vote to open the CBR rather than somehow finding $200 million in cuts to the current year’s budget or tapping into the Alaska Permanent Fund, a red line for many legislators.

So, after leveraging the CBR vote to the maximum for several years, the House Majority is now in the less-than-enviable position of having to secure the 30 votes for the Constitutional Budget Reserve from their membership and the bipartisan House Minority, giving the bipartisan House Minority a fair bit of leverage moving forward. For everyone’s sake, we should hope they’re a little more reasonable in their demands.

Stay tuned.

Follow the threads: Senate Finance on the PFD bill, House Majority presser and the Senate presser