With oil prices down far below the rosy projections the Alaska Legislature had when it passed the budget last year, the state of Alaska could run out of money before the end of the fiscal year on June 31—a situation that could force unilateral cuts by Gov. Mike Dunleavy and missed bills—but key legislators say it’s not not likely to come to pass.
Here’s the situation: Basically put, a string of worst-case scenario days of lower-than-expected revenues and high expenses could see the state’s budget temporarily dip into deficit territory for the current year. It also could slightly miss the revenue projections altogether. Either case wouldn’t be a problem in a typical year because the state has savings accounts that can serve as a buffer, but it is a problem because escalating budget politics in recent years (mostly House Republicans pulling whatever levers they can to get a bigger PFD or anti-abortion votes) has cut off access to the biggest deficit-covering account in the Constitutional Budget Reserve.
So, instead of having somewhere between $500 million and $2 billion available to cover those gaps, the state instead only has about $20 million in the Statutory Budget Reserve (which would be bigger if not for a veto by Gov. Mike Dunleavy). That would cover just a fraction of what state officials say a high day of bills could be.
While the issue has been percolating for much of the session, it came up again at Tuesday’s Senate Finance Committee meeting with Legislative Finance Division Director Alexei Painter, who outlined the latest outlook for this year’s budget.
The good news, Painter said, is the state’s revised oil price forecast (which is far more conservative than last year’s) has been generally accurate. The bad news: Even with a generally accurate oil price forecast, this year’s budget is coming in with essentially zero margin for error (seriously, it’s set to overspend by about $300,000 once you roll in the governor’s proposed supplemental budget for this year).
Here’s what Painter had to say about the situation, which will largely depend on notoriously volatile oil price and production:
“Even if we absolutely nail everything, there’s still some margin of error because of individual (oil) company activity. There’s things that we don’t anticipate,” Painter said,. It’s very much within the realm of possibility that we could completely nail price and production and still end up $20 million off, leaving an unfunded budget.”
There’s a lot of ifs in that assumption, too, like the Legislature adopting the governor’s proposed supplemental budget—which usually covers unexpected costs like fire fighting—without any changes in either direction. Legislators could build themselves some breathing room by making cuts to the both the supplemental budget and the already approved budget (through negative appropriations), but there’s also significant pressure to put in new spending for things like addressing the state’s food stamp backlog or provide the matching funds for federal ferry funding.
Ultimately, Painter said the leaving just a $20 million buffer is far too close for comfort for the rest of the year, urging legislators to consider the issues as they move forward.
“If the Legislature does adopt the governor’s supplemental budget as it exists, the Legislative Finance Division would strongly recommend designating a source for deficits beyond the SBR balance,” he said. “Having $20 million of headroom is just not sufficient to be safe and avoid an unfunded budget at the end of the year, after the Legislature has adjourned for the year.”
Senate Finance Committee co-chair Sen. Bert Stedman asked for some clarification on what that scenario would look like:
“What happens or what should we expect if we ran short of $100 million, $50 million or $200 million in June at the end of the fiscal year?” he asked. “Do we trigger the impoundment clause, do we shut the state down, does the world end? What’s the ramifications?”
Painter said the impoundment clause, a statute that allows the governor to halt some spending in the time of an uncovered deficit, may trigger. The largest target would be about $75 million in this year’s budget slated to go to the Port of Alaska/Anchorage in the next budget year. He said, though, that doing so would create problems elsewhere in the budget.
“There would not be particularly great options on the table,” he said.
Later at the Senate Majority’s weekly news conference, Stedman said it’s not likely to come to that. He said the Legislature still has an opportunity to build some breathing room into this year’s budget. Some of those changes could include wrangling the votes to access the Constitutional Budget Reserve (a politically tall task that legislators could use as a lever for other political causes), making cuts to or delaying existing spending (like the port funding) or looking to other savings accounts like the Alaska Permanent Fund’s earnings reserve account (another politically tall task given it’d break the fund’s strict, but technically optional spending rules).
He said the Constitutional Budget Reserve vote is unlikely and has personally been one of the Legislature’s most stout guardians of the Alaska Permanent Fund’s spending limits.
“What we’re going to be doing is looking at the current budget year and seeing if we can’t shave a few areas off or, if oil prices hold up and go up a little bit, then we might skate through. It’s just a nip and a tuck. The concern is brought to the surface because there doesn’t be seem to be support within the Legislature to get a three-quarter vote to allow access to one of our main savings accounts: the Constitutional Budget Reserve. There’s plenty of money there to fix this little hole,” he said. “If we can’t get the votes or if elected officials demand additional spending for their vote, that just digs the hole deeper and makes matters worse. Then we have to do the financial dance to get us through July.”
But is it a potential shut-down-the-state scenario? Will the world end?
Stedman said it’s not going to come to that. The state will figure something out, he said, but just what that is will be a matter of politics.
“I wouldn’t worry about the state missing payroll. It’s just not going to happen. What we’re talking about here is being on the razor’s edge of the end of the fiscal year and how we’re not going to get sliced up at the end,” he said, later adding. “Worst-case scenario, we might have to address it in July. … We’re basically on a razor’s edge right now. There’s nothing to worry about, the checks won’t be late. It’s the internal financial politics in the Legislature.”
Why it matters: There’s a fair bit of doom and gloom in these projections, but highlighting them now as a very real possibility now gives legislators and the governor more time to avoid it ultimately coming to that. If I had to put money on it, I’d expect the Senate to push for so-called “negative appropriations” that make cuts to already-approved spending to build in additional room. It’s also another good reminder of just how much of a swing oil prices can have on the bottom line of the budget. A few dollars per barrel higher, and the state’s in smooth-ish sailing. A few dollars lower, and they’re going to be looking for cuts in the tens or hundreds of millions of dollars.
Stay tuned.
Matt Buxton is a long-time political reporter who has written for the Fairbanks Daily News-Miner and The Midnight Sun political blog. He also authors the daily politics newsletter, The Alaska Memo, and can frequently be found live-tweeting public meetings on Twitter: @mattbuxton.
Matt Acuña Buxton is a long-time political reporter who has written for the Fairbanks Daily News-Miner and The Midnight Sun political blog. He also authors the daily politics newsletter, The Alaska Memo, and can frequently be found live-tweeting public meetings on Twitter.
