Painful effects could be on horizon for Alaskans

Posted: Sunday, June 29, 2003

After years of budget debate, millions in legislative cuts since the late 1990s and, this year, $137 million more in budget vetoes by Gov. Frank Murkowski, even casual observers are aware Alaska is in the midst of a critical financial crisis.

State lawmakers, Gov. Frank Murkowski and his administration have spent countless hours on the issue. Come Tuesday, the fiscal year 2004 state budget they've written goes into effect, a spending plan they say is a major step toward solving that crisis head-on.

For many Alaskans, the impact of budget cuts could soon become apparent. So, too, could the effects of restructuring going on in several departments, most notably, the departments of Health and Social Services, Fish and Game and Natural Resources all aimed, supporters say, at closing the gap between the state's income and its spending.

Critics have charged the cuts hurt Alaska's most vulnerable, and that departmental changes will cut Alaskans out of the important decision-making processes.

Of all the states in the union staring down the barrel of shortfalls in the next fiscal year, none have deficits in relation to their total budgets as high as Alaska's 37.8 percent, based on projections of an $896 million deficit released by the state Office of Management and Budget in November of last year. Only California's 36.8 percent comes close.

Compared to those of some other states, however, the estimated deficit Alaska faced as state officials began writing the FY 2004 budget in January appears rather modest. Consider the $10 billion to $12 billion worth of red ink in New York or the whopping $18 billion to $26 billion worth drowning California. According to data from the Center on Budget and Policy Priorities, a Washington, D.C., non-profit research organization, 17 states have deficits of more than $1 billion. But deficit impacts are relative. Many of those states have overall budgets far larger than Alaska's.

Alaska has faced sizable deficits for years, and budget analysts warn those shortfalls are sending Alaska's ship of state sailing toward the cataract. While legislatures and administrations have made some effort to navigate course changes since the mid-1990s, with debatable success, they have faced a daunting task, complicated by falling North Slope oil production (oil revenues account for 84 percent of all state revenues), a political adversity to imposing new taxes and expensive government services constituents want protected.

General-fund spending has been shaved over the past several years, but this year, Murkowski subtracted $137 million more with line-item vetoes. The Office of Management and Budget predicts further cuts are probable in coming years.

While Alaska can fairly claim its share of budget woes, it has in its hip pocket something no other state does a savings account worth an estimated $22.5 billion called the Alaska Permanent Fund.

Unfortunately for those seeking budget solutions, it is a sacred cow, virtually beyond the reach of lawmakers to tap as a funding source in any meaningful way. Today, only the earnings averaged over five years are tapped. Half goes to dividends, the rest is rolled into the principal. The state's general fund gets nothing.

That may change next year as lawmakers consider, among other things, a bill proposing to amend the Alaska Constitution and tap the fund principal by splitting a sum equal to 5 percent of the fund's total market value each year.

Rep. Paul Seaton, R-Homer, said he thinks a ballot measure to do just that is destined for a vote in 2004.

"We need to stabilize the way we do our finances," he said. "That is one part of the puzzle."

House Speaker Pete Kott, R-Eagle River, said earlier this year that the permanent fund needs to stop being "a sacred cow" and become "a cash cow for the state." He said Alaskans consider the dividend "an entitlement," a view he doesn't share. He said the dividend program had been a mistake.

Senate Minority Leader Johnny Ellis, D-Anchorage, said he has no doubt a move on the permanent fund is in the works, because Republicans have backed themselves into a corner in opposing taxes as an alternative revenue source.

"I think the Republicans and the governor will mount a full-court press next year to use the permanent fund for government," he said. "Their wealthy supporters will back that before taxes."

Ellis said the role of minority Democrats would be to ensure fairness in whatever develops.

Absent access to the permanent fund, the Alaska Legislature has commonly relied on the Constitu-tional Budget Reserve to fill the gap between revenues and state spending. Created in 1990 as a buffer against the kind of radical swings in the price of oil that leveled a body blow to the Alaska economy in the 1980s, the CBR is the repository of one-time settlements from disputed oil and gas royalties and taxes as much as $7.9 billion over time. Draws necessary to meet shortfalls in 10 of the last 12 years, however, have whittled that sum to $2.2 billion. According to OMB, if nothing is done to alter the status quo, the CBR will disappear in 2005.

To avoid that, Murkowski told lawmakers to write an FY 2004 budget that drew no more than $400 million from the CBR. Meanwhile, he sought to cut nearly $190 million in built-in budget increases, mostly in formula programs and debt service, and proposed new user fees and taxes, including a 3-percent statewide sales tax.

Long-term, Murkowski is banking on resource development to solve the fiscal crisis by adding significant new revenues down the road. To make that happen, he eliminated the Habitat Division in the Department of Fish and Game, shifting its functions to the Department of Natural Resources. That and other moves were meant to streamline the resource-development permitting process. Legislation limited local community input into development decisions and made resource-related court challenges more difficult.

But when the gavel came down on the session in May, some of the governor's short-term fixes had failed to pass. Lawmakers rejected the sales tax and sought to draw more than $400 million from the CBR. Murkowski responded with roughly $137 million in line-item vetoes.

He cut $54 million from department budgets and ended the Revenue Sharing and Safe Com-munities programs to local governments for another $22 million savings. Some $44 million was cut when the governor eliminated the Longevity Bonus Program, ending the monthly stipends to some 18,000 elderly Alaskans. He also cut $15 million in community capital matching grants and crossed off $2 million in capital project reimbursement payments.

All told, budget reductions and assorted vetoes sliced state spending by about $198 million. Revenues also were lowered by $223 million, according to OMB figures.

The budget cuts aren't merely cold figures on paper. They represent meaningful changes in the way the state will deliver services in FY 2004 and, in some cases, are painful wakeups to the recipients of those services.

Take the Department of Health and Social Services, at $1.6 billion, the state's most costly. The agency that handles programs such as services to children, drug and alcohol abuse and prevention, medical assistance, mental health, public assistance and public health took the heaviest hits in terms of cuts, including $70 million in vetoes.

Some savings were realized by a wholesale restructuring of the department and expected additional federal revenues, much of it connected to Medicaid, according to DHSS Commissioner Joel Gilbert-son.

But there will be pain, say lawmakers skeptical about the wisdom of some cuts and other changes to the way departments will operate. An effort already is under way to roll back one of Murkowski's vetoes.

Hoping to return $44 million to the budget, minority Democrats have called for a special session of the Legislature to override Mur-kowski's veto of the Longevity Bo-nus Program. So far, there appears to be little support among majority Republicans. None has yet said they would support a special session.

"It's up to Republicans to keep faith with seniors," Ellis said, adding he doubts one will be called, primarily because Republican lawmakers don't have to take the blame. Instead, Murkowski will take the heat for his veto.

"That's not going to happen," Seaton said of the special session.

Lawmakers considered revenue mechanisms that might have salvaged the program, including a sales tax, but never approved anything, he said. It isn't likely the majority would call a special session just to dip into savings for the Longevity Bonus Program at this point, he said.

Speaker Kott affirmed that in a recent Associated Press story in which he called the Democrats' move a smoke-and-mirrors tactic to score political points. He said there would be no special session.

For now, Alaska's government depends heavily on the Constitu-tional Budget Reserve, and OMB says there are several ways to extend its useful life. Which scenario may ultimately be selected could depend on how willing Alaskans are to bite bullets.

Here are a few examples for comparison.

OMB's first scenario is to do nothing. But that leads to the Constitutional Budget Reserve account balance running out in FY 2005. Other scenarios would have varying impacts on the CBR's sustainability but would require additional cuts to the budget next year and flat spending thereafter.

One scenario (OMB's fourth) assumes conditions actually in the FY 2004 budget. That is, a general fund budget totaling $2.3 billion, vetoes worth $137 million and a $400 million cap on the CBR draw. According to OMB, this effectively protects the CBR through FY 2009.

Other scenarios assume provisions not adopted this year, such as a 3-percent statewide sales tax and a $.12 cent motor fuel tax increase, whose added revenues would be expected to have positive effects over the next decade.

Two scenarios are liable to arouse the interest of voters because they envision a vote to change the Alaska Constitution regarding the Alaska Permanent Fund.

According to OMB, limiting general fund spending to no more than $2.3 billion a year (assuming FY 2004 vetoes), increasing revenue from motor fuel and sales taxes and instituting a percent-of-market-value approach, also known as POMV, to permanent fund spending would provide a steady stream of dividends in excess of $1,000 a year and keep the CBR buffer in place indefinitely.

The Alaska Permanent Fund Trustees say a POMV approach would ensure money for dividends, give lawmakers a source of funding for state programs and inflation-proof the fund sufficiently to keep it growing into the future.

Thus, state budget planners have several paths to consider as they try to guide Alaska out of the current fiscal crisis. But any approach is likely to be controversial and perhaps politically hazardous. Many lawmakers face a dilemma. Many won election, in part, by promising to leave the permanent fund alone. But they aren't anxious to vote on an alternative revenue stream a broad-based tax package in an election year.

That leaves the permanent fund, Ellis said, adding that while he isn't totally opposed to some kind of market-valued approach to use of the fund, the devil always has been in the details.

"The real showdown will be over the split; what percentage would go to dividends and what percentage would go to government," he said.

Seaton thinks there is general agreement that a 50-50 split between dividends and government programs would find acceptance.

Ellis said 50-50 was "a nonstarter" for him, because it is too large a percentage for the general fund.

Sen. Tom Wagoner, R-Kenai, said he isn't convinced the POMV approach to the permanent fund is the way to go. The permanent fund has been a good investment, averaging around an 8-percent gain a year. The uncertainties of the stock market make authorizing an annual 5-percent expenditure a risky decision, he said.

"I will take a long, hard look at it. My job is to analyze what is best over the long run," Wagoner said. "I'm not sure we need that revenue stream until we have a constitutional spending limit placed on the Legislature."

Seaton also said tapping the fund is only a partial solution. He is one Republican who said he thinks fixing the fiscal gap will mean considering broad-based taxes, despite the political hazard some might see in voting for such measures.

"I think there will be political hazard in not looking at a tax package," Seaton said. "We have to consider everything."

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