No budget and half-baked plans continue to be the norm in Juneau

If you’ve been paying any attention to Alaska politics, you’re aware of the paralysis that continues to plague the Legislature. I arrived in Juneau in January, right before session began, and just got back to Anchorage. The Capitol remains closed to the public due to COVID-19 – a policy some legislators love and others hate. I was fortunate to be given a legislative press pass, so I was allowed to be in the building. I had an up-close look at the dysfunction that continues to dominate our state government.

The Alaska Legislature is more than a week into a special session, and a budget has yet to be passed. The special session was called by Governor Mike Dunleavy (R – Alaska) because the Legislature did not have the votes to extend the session ten days or call their own special session. Keep in mind that they failed to pass a budget by the 90-day statutory deadline, and the constitutional 121-day limit. Last year, they were able to pass a budget in under 70 days due to the pandemic. But that was an anomaly.

When the session started, several legislators, including members of Senate leadership, expressed a desire to finish by the end of March because of COVID-19. That was wishful thinking, as the House took a full month after the start of the session to organize, just like they did two years ago. The American Rescue Plan Act (ARPA), signed into law on March 11 by President Joe Biden, did add some uncertainty to the budget process: Federal guidelines on how the state could spend the $1 billion it was set to receive did not come out until May. This created a convenient excuse for many legislators, who claimed a budget could not be passed until after the guidelines came out. But lawmakers could easily have passed a budget and then come back for a supplemental budget for the ARPA money. They also could have passed a budget by the 121-day constitutional limit, which occurred weeks after the APRA guidelines came out. But they did neither of those things.

The problem is the Permanent Fund dividend issue, which continues to paralyze the Legislature. The House’s version of the operating budget had no dividend. The Senate’s version has approximately $2,300, which is the approximate amount it would be under Dunleavy’s new 50/50 constitutional plan for the Permanent Fund. More on that later. The $2,300 amount was passed as an amendment on the Senate floor in a 12-8 vote. A previous amendment for a full statutory dividend failed 10-10. The Senate Finance Committee originally included a $1,000 dividend, paid out of the dwindling Constitutional Budget Reserve (CBR). The CBR has a little over a billion dollars in it. A $1,000 dividend would cost around $700 million, leaving the CBR below $500 million. Just eight years ago the combined CBR and Statutory Budget Reserve (SBR), another savings account that was depleted in 2016, was over $16 billion. Nearly a decade of deficits has left Alaska with almost no remaining savings – except for the Permanent Fund.

The Permanent Fund just hit a record $80 billion in total value. Many legislators, and Dunleavy, tout this as a great reason to spend its earnings on big dividends and government. Paying the $2,300 dividend amount the Senate passed would require a $1.5 billion overdraw on the Permanent Fund. Something many in the House Majority do not support. In 2018, after a dramatic decline in oil revenue, the Legislature passed Senate Bill 26. This bill limited the yearly draw on the Permanent Fund to 5%, which lawmakers agreed was the maximum sustainable amount. The 5% amount for the upcoming fiscal year is just over $3 billion. When you add in all other income, like revenue from oil, Alaska is set to take in around $4.7 billion. That is roughly the amount of the combined operating budget and capital budget. But when you factor in a dividend, everything changes.

Candidate Dunleavy, along with many legislative candidates, campaigned on not only a full statutory PFD, but also on back paying Alaskans years of dividends that had been below the statutory amount since Walker used his line-item veto power to reduce the PFD in 2016. Since taking office in 2018, Dunleavy has failed to get the Legislature to even entertain this idea. The PFD was set at $1,606 in 2019 and $992 in 2020 by the Legislature, far less than it would have been under the statutory formula.

Recently, Dunleavy has backed off the full statutory PFD idea and come out with a new plan. He wants to put the Permanent Fund in the Alaska Constitution and split the 5% annual withdrawal evenly between government and the dividend – an idea known as the 50/50 plan. Several Republican legislators, including Senate President Peter Micciche (R – Soldotna) and House Speaker Louise Stutes (R – Kodiak), stood with him at a May 12 press conference where he unveiled the new plan.

At the same time, Dunleavy also proposes putting the Power Cost Equalization Fund (PCE) into the Permanent Fund, thus protecting the billion dollar account from being touched by the Legislature. This was also a ploy to get the powerful and influential Senator Lyman Hoffman (D – Bethel), on board, as PCE is a program he cares deeply about. Hoffman, a member of the Republican Senate Majority, was the only Democrat at the press conference.

Passing a constitutional amendment is not easy. It requires a 2/3 vote of each body (14 in the Senate, and 27 in the House), then a majority vote of the people. By attempting to put the Permanent Fund and dividend into the constitution, Dunleavy is attempting to end the yearly fight over the dividend – a laudable goal. But his plan has a major flaw: He has not proposed any new revenues or significant spending cuts – even though those would need to happen under his plan to keep the budget balanced.

Instead, Dunleavy is asking the Legislature to transfer $3 billion from the earnings reserve of the Permanent Fund to the CBR, to fill the deficits that would remain from his plan for a few years. This would be yet another overdraw. Once money is taken out of the Permanent Fund, the fund’s ability to earn money shrinks. At a 5% draw, a $3 billion transfer means $150 million a year less for the state, every year. Add in the additional $1.5 billion overdraw required for the Senate’s $2,300 PFD, you reduce the yearly draw to the state by $225 million, every year. Transferring the $3 billion from the earnings reserve to the CBR is also convenient for Dunleavy’s reelection next year. If that happened, there would be no talk of deficits next year.

Unlike the CBR, which requires a 3/4 vote by the Legislature to spend, taking money from the Permanent Fund earnings reserve just requires just a simple majority. Dunleavy’s revenue commissioner, Lucinda Mahoney, and deputy revenue commissioner, Mike Barnhill, have been presenting his plan to the legislative committees. They paint a rosy picture of the future. Big Permanent Fund gains will mean things are going to be really good in the future under this plan, they say.

Think about this, though. Every year the Governor’s Office of Management and Budget puts out a ten year plan. Ten years ago, they said today we would have $24 billion in the CBR and SBR, North Slope crude would be over $100 a barrel, the state would be taking in almost $6 billion in yearly revenue, and the budget would be over $6 billion. Today, the SBR is empty, the CBR has about $1 billion, North Slope crude is $68 a barrell, revenue is around $4.7 billion and the budget is about the same.

The blame does not lay solely on Dunleavy. This mess started before he was governor, although he did vote to spend down most of the savings when he was a senator. Few in the Legislature are serious about solving the state’s problems. Many legislators will say in private exactly what needs to happen, but then say the opposite when speaking in public or do the opposite when voting. The budget is now in a conference committee. This is where things are negotiated in private meetings. Few know how it works. And the ones who do wield a huge amount of power over the process. Once the conference committee is done, it goes to each body for an up or down vote. The main issue, once again, is the dividend. There is another issue of the 3/4 vote for the “reverse sweep.” This prevents all kinds of accounts from being swept into the CBR, causing the kind of chaos to many state programs that we saw in 2019. The 3/4 vote will likely end up being tied to the dividend in order to get the votes. But this will only cause more anger and frustration from legislators who support a larger dividend or who just don’t understand the process.

The current special session ends June 19. Little progress has been made. The Capitol looks like a ghost town as most legislators and staff have left Juneau. Dunleavy was bear hunting last week and then went to Nashville for the Republican Governors Association spring meeting. Few would know the depths of our problems by stepping foot in the Capitol. And they can’t anyway, because it’s still closed to the public. Alaska is in desperate need of leadership. Unfortunately, there is little in the way of leadership in Juneau.

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1 year ago

The illusion of leadership.

1 year ago

Jeff, That is an amazing summation, well done. Senator Dunleavy also voted for SB21 which arguable is why we are in the fiscal dire straights we are now, studying the Susitna Dam, the Gas pipleline, and numerous other boondoggles. A fiscal conservative he is not. Something that is never brought up, and am sort of embarrassed to admit it-but during Governor Palin’s 1/2 term she saved the state of Alaska. She rewrote the tax structure on our oil and pumped our savings which we have now burned through. SB21 rewrote the oil tax law to be clearly based on advertisement… Read more »