House Finance Committee takes up financial situation

Persily: Does state have time to wait for enough revenue for a balanced budget?

Legislators wrestling with the challenge between the needs of Alaskans hard hit by the economic downturn of the pandemic and a struggling state budget got a clearer picture of the situation during in a hearing in advance of the Jan. 19 start of the new session.

In a House Finance Committee hearing in Juneau on Jan. 8, with most participants communicating virtually, they drew somber conclusions, including that Gov. Mike Dunleavy’s proposed budget would create a $2.1 billion deficit in the upcoming budget year, much larger than the administration suggests.

A statement issued by the committee, chaired by Rep. Neal Foster, D-Nome, said the governor’s budget would draw $3 billion from the Permanent Fund earnings reserve to pay the largest dividends in history, a move that would significantly reduce the fund’s investment potential and risk future dividends from being paid out. The amount available for dividends and essential services every year would decrease by $200 million by 2030, the committee concluded.

The governor’s 10-year budget plan assumes that a new tax will be in effect 18 months from now, generating $1.2 billion in new revenue in the fiscal year that begins in July 2022, but he has not yet offered a plan to implement a new tax, the committee said.

While Dunleavy correctly states that the Permanent Fund’s value has grown by approximately $10 billion this year, he fails to mention that the fund also previously lost more than $7 billion during the pandemic, meaning the fund growth he cites as justification for deficit spending is far less than he suggests, the committee report said.

That information came during the committee hearing from testimony from Larry Persily, former deputy commissioner of the Alaska Department of Revenue.

“Everything you take out over 5 percent from the Permanent Fund now takes out from dividends in the future,” said Persily. “This really comes down to two questions, and they deal with time and money. Does the State have enough time to wait for enough revenue for a balanced budget? And where will that money come from?”

Persily noted that the governor was correct that the Permanent Fund assets gained $10 billion from April 1 through Nov. 30 of 2020, “but that’s not the whole story,” because Permanent Funds assets lost over $7 billion during the first three months of last year, he said.

The governor has proposed in his budget proposal an additional $1.2 billion draw in the spring of 2021 to give Alaskans about $1,900 each, plus a $2 billion draw after July 1, from the fiscal year 2022 budget, which would have to be approved by legislators in 2022 to pay the so-called full dividend of $3,000 in the fall, he said.

Foster called the hearing “a sobering but instructive reminder that we all need to be on the same page to get our financial house in order.” Foster added that he is hopeful that the governor and legislators will have a productive dialogue during the upcoming session “and work together to hart a long-term course toward balanced budgets that will also move Alaska into a bright future.”

“Without decisive action we may have a $1.3 billion deficit by 2023 and no money left in the Permanent Fund earnings reserve account to pay for dividends or the government,” said Rep. Jennifer Johnston, R-Anchorage, co-chair of the House Finance Committee.

Both sessions of the committee hearing are available at akleg.gov.