Introduction to 29th Legislature, Second Session

Medium Grind -- News and Analysis

It’s no secret the 29th Alaska State Legislature gavels in dangling above a deep, but not impassable fiscal canyon. Many legislators have referred to an impending fiscal cliff, but like Wile E. Coyote, if they’d only look behind themselves they’d see they’ve already sprinted out beyond solid ground – only artificially, and tenuously supported on a plank of crumbling state savings. The widespread consensus in Capitol hallways is something must be done, and soon. There is little agreement about what exactly that something should be.

This first Grinder News post provides a high-level overview of where Alaska is and, to some extent, how we got here. Two other posts today will look at some of the options in front of Legislators so far. As the session progresses GN will dig down into the details of these issues, and will keep a close eye on the political process in Juneau.

 

90 Percent is a lot

Like a straight jacket, it’s easy getting into a fiscal dilemma and (usually) difficult to get out. To get in you just have to be a little crazy – to get out you have to at least be clever. To stay out you’ve got to be downright smart, or remarkably lucky. Since its first oil boom Alaska has often gotten into the same dilemma almost the exact same easy way. Legislatures and administrations have spent more and saved less in big revenue years only to panic and slash in the lean years. The problem has always been that revenues, for many years now, have come almost exclusively from oil royalties and taxes. In fact, until last year 90 percent of Alaska’s spending cash came from oil revenues. Ninety percent is a lot.

Some of our problems were predictable. A few years ago someone shouted, “Production is declining!” A cry went up from the people. What’s this? Oil can run out? The decline has continued in a geologically-predictable way. Making things worse, Alaskans realized our original oil tax structure had let us down. The Economic Limit Factor system was built around the idea that Alaska should tax oil higher in the early years and then allow the tax to diminish, eventually petering out as fields matured. Unfortunately, a lot of the big bucks from Alaska’s legacy fields came during the long, lingering harvest years. With a diminishing tax rate, that effectively fell to zero, Alaskans missed out on a lot of revenue.

In 2006 Gov. Frank Murkowski changed all that. Murkowski changed Alaska’s taxing philosophy from a gross-based regime to one based on profits. His Petroleum Profits Tax (PPT) did produce more revenue than ELF, but it was imperfect and passed under a cloud of corruption and was doomed really from the start. The rest we all remember all too well. People went to jail. The Palin administration gave us ACES, also a net-based tax structure, but one that introduced progressivity into the mix. For the oil lobbyists and representatives haunting the Capitol hallways it was as if someone had introduced the idea of plague-based taxes. I’ll write more about that in a future article. The story here is that ACES passed in a flurry of activity on the last night of session with the idea that the state would give up some protection at low oil prices, but that progressivity would reap Alaska windfall revenues at high oil prices. The top of the progressivity scale was outrageously high, most people agreed, but oil would have to be in the neighborhood of $100/bbl before it was an issue, and surely we’d never get there. Within a year, to pretty much everyone’s surprise, we got there. Suddenly the state was rolling in more cash than ever before. The legislature and administration spent a lot of money, but to their credit, they put away a fair amount, too. If they hadn’t, we’d all be out plowing our own streets and homeschooling our kids right now. That savings will keep the lights on this year, and maybe two years longer.

With the demise of the Senate Bi-Partisan Working Group and an increasingly conservative culture in both the House and Senate it was inevitable ACES would fall. Oil lobbyists had convinced many Alaskans that more production was better than more money per barrel, and that by letting them have their windfall dollars back we cold get there. ACES was replaced with the more industry-friendly SB 21. That bill essentially did away with progressivity, but by logic and necessity, installed a firmer floor and minimum tax to protect the state at low oil prices. Should oil drop below say $50/bbl SB 21 would actually be worse for the industry than ACES was. Surely, though, we’d never see prices that low again ... within a year, we did. It’s hard not to see at least a little humor in the fact that the Legislature had bumbled its way into (sort of) stiffing the industry twice. But no one’s smiling now that oil is in the $30/bbl range, and the state is facing a $3.6 billion revenue shortfall with 90 percent of its old cash cow looking more and more like a mechanical bull running out of juice. Ninety percent is ... a lot.

 

A Reversal of Fortunes

How much is 90 percent? Well, if you took 90 percent of your paycheck and divided it by three you’d probably need to cut your vacation budget pretty severely. It would mean a $100 thousand salary one year would be $40 thousand the next. Cancel Christmas. The fact that the Legislature was able to sock away billions in savings just a few years ago and now has to wrestle with a $3.6 billion revenue shortfall – each year – is staggering. In the past Alaska has always been lucky. Each decline was followed by a boomier boom. Most experts agree, not this time. Oil prices aren’t going to rebound far enough, fast enough to save us. A natural gas pipeline, if one ever gets built, will not be enough to save us, and if we get it wrong it could wreck us.

The state has less than $7 billion in the Constitutional Budget Reserve, the Legislature’s primary savings account. It may or may not be enough to cover the bills for two more years. In past years the CBR has been replenished, either by settlements of large oil-related cases or by appropriation. Neither of those things is in the cards now, so as far as the CBR goes, what you see is what you get. Seven billion looks like a lot when you’re in the habit of checking the per-unit prices on different cereal brands, but when you’re trying to pay for everything from education to pothole repair, it goes quick.

Cuts are inevitable. It’s the politically-expedient thing to do, but it won’t change the math. GN will cover in greater detail how much is even possible to cut in later articles, but at the most basic level you could shut down the entire government and still be deep in the hole. Most of the money goes to Education and to Medicaid formula spending. Without significantly cutting neighborhood schools and health care access there’s really not a lot of money to be had in the rest of the government. Cutting things like schools and health care are very popular, when you’re cutting someone else’s district. And that brings us to ...

 

The Danse Politic

At their Tuesday joint press availability members of both minority caucuses spoke of cooperation and statesmanship. Fairbanks Rep. Scott Kawasaki evoked James Freeman Clarke by paraphrasing his notion that “A politician thinks of the next election. A statesman, of the next generation.” The Democrats, though typically vague on the details, said they’re committed to a sustainable budget that doesn’t do Alaskans more harm than good. About an hour later Senate Finance Co-chair Rep. Pete Kelly, at the Senate Majority presser, said he’s heard a lot of people talking about a sustainable budget, but that they’re the wrong people. They’re the kind of people, he said, who think government is about the right size now. So far so good on that statesmanship/cooperation plan.

Almost every Alaskan legislator knows it’s going to take some combination of cuts, taxes and some use of Permanent Fund earnings to pull Alaska through this one. It’s a rare few who are willing to speak it anywhere other than into the safety of their pillows – followed by sobbing. They will talk a lot this session about making the tough choices, but they’ll always go to the most politically-expedient tough choice first, and hope like hell someone else will be the first into Dr. Evil’s pool of ill-tempered, mutated sea bass.

Governor Bill Walker actually took the plunge for them with the introduction of his Sovereign Wealth Fund concept. The proposal is broad and bold – some might say suicidal. It has bitter pills for both Democrats and Republicans. Walker has described it as a starting point, but it remains to be seen how far legislators will take it in an election year.

Alaska votes for 50 of its 60 state legislative seats every other year, and there’s nothing like an impending election to turn a statesman into a politician every time. Democrats are terrified that if they even accidentally mutter the word “tax” they’ll be pilloried by the masses and driven to the border with little more than a canteen and a map to California. It’s happened before, so it’s hard to blame them. Republicans are terrified to be labeled as Permanent Fund raiders, so they tip toe around ... or away from ... the topic as much as possible. As a result, the one thing both groups can agree upon is that more cuts are needed. Just exactly where the cuts should be made, or how people know cuts needed is difficult to pry out.

Complicating things further, and contrary to some popular opinion, none of the caucuses is anything like monolithic in philosophy or practicality. Speaker Mike Chenault expends a great deal of effort to maintain some semblance of peace between his tea party members, the moderate Republicans in the caucus and the rural Democrats who caucus with the House Majority. The Senate Majority is a little more manageable, but there are still philosophical differences between the new leadership and those who were more content in the bi-partisan coalition of a few years ago. Both the House and Senate minorities are mostly loose affiliations of people with vague philosophical similarities. They are not only non-binding caucuses, but they also take pride in their tendency to rarely, if ever, arrive at a caucus position. This lack of cohesion in the caucuses might present an opportunity for some cross-pollination and deal making between individual legislators, but for one thing. The majority caucuses are binding. That means members are required to vote as a bloc on procedural votes – most significantly, the budgets. This is not a suggestion or a polite request. Several years ago Nancy Dahlstrom bucked the system and found herself out on her ear. Last year Lora Reinbold threw the tea overboard on the budget and found herself swimming alone in the kiddie pool.

The binding caucus rule is one of the reasons the budget process is likely to run long again. Majority leadership will not bring the budget to the floor until they’ve got the votes to pass it, and that will mean some caucus wrangling this year, just as it did last year. It’s one thing to require all your members to vote yes; it’s something else altogether to give them a bill that makes them want to do it. Holding the group together trumps all.

The other potential bottleneck is the ever-exciting (though soon to be extinct) CBR vote. I’ll write more about the Constitutional Budget Reserve and other savings accounts in other articles, but for this article it’s enough to say a balanced budget is not likely to be passed without using significant CBR funds, and that requires approval of three-fourths of the members in each body. It’s no problem in the Senate where there are only five minority members. Democrat Lyman Hoffman caucuses with the majority. In the House it’s a different story. The self-styled Alaska Independent Democratic Caucus (with 12 Dems and one independent) has enough members to block a CBR draw. It was the negotiations to bring some Dems along last year that stretched things out so far. Whether you think it’s good or bad, it’s the one thing that forces majorities to work with minorities, and it serves as a modest check to the binding caucus rules.

Over the next three months Alaskans will learn whether or not their elected representatives are politicians or statesmen. GN will be in Juneau to follow all of the developing stories.

The other two primary posts today will provide overviews of some of the revenue options in front of legislators at this early stage in the session. Deeper analysis will follow as the debate unfolds.