Budget Basics for the Rest of Us

A General Overview of Alaska’s Budget Process

 

Medium Grind – News and Analysis

As the House steps up its budget game in the next few weeks it might be useful for Grinder News readers to have a some background on key terms and a basic guide to how the process generally works. Hopefully this article will provide some useful information to make the budget process a little more accessible.

SOME BASIC TERMS AND CONCEPTS

 

Kinds of Money

One thing that makes budgeting tricky is that there are different kinds of money. The Legislature doesn’t just get a pot of money to make it rain wherever it wants. When you think about it, we regular folk suffer from the same problem. Some of your money goes to help fund the federal government – to make sure you don’t forget, the government conveniently takes its cut before you get your check. But once you get the check, some of the money is already spent for things like car payments, mortgage or rent, utilities etc. What’s left over is your discretionary income – you can choose to scrimp a little on groceries and get that latte on the way to work. You could ride your bike to work and use that gas money for a pedicure. It’s usually not a lot of money, but it’s all up to you! Alaska’s state government budget is a little like that, too. Here are the main kinds of money:

Restricted Revenue

Restricted revenue is money that goes to the state budget, but over which the Legislature has limited or no control. It’s like the part of your paycheck that’s already spent on bills. It falls into the three main categories below:

Federal Funds: Alaska receives about $3 billion in federal funds. When the state was earning huge revenues from the combination of high oil prices and the progressivity feature of the ACES oil tax regime that amount accounted for about a third of the state’s revenue (not counting investment revenue – Permanent Fund earnings). In 2015 federal receipts were closer to half of the state’s revenue; for 2016 federal receipts are expected to represent about 60 percent of the state’s non-investment revenue. Some federal funds are considered “matching,” meaning it requires some fiscal contribution from the state – though usually not on a one-to-one basis (the feds generally kick in more than the state). Federal funds are normally designated to specific purposes; the Legislature has little or no discretion over use of federal funds.

Designated General Fund: Though the Alaska State Constitution prohibits the formation of designated funds, the Legislature has created some statutorily-designated funds, and the earnings of those funds can only be used for specified purposes, like the Railbelt Energy Fund or the Power Cost Equalization Fund. Some restricted funds also come from specific taxes or fees that can only be used for specified purposes, like Department of Motor Vehicle fees.

Other Funds: The last category of DGF is “Other Funds;” pretty much what it sounds like. It’s a relatively small amount of revenue that comes from outside sources but generally must be used for specific purposes.

Unrestricted Revenue (along with unrestricted savings)

Unrestricted revenue, and savings, is basically the government’s discretionary income. It’s a combination of general fund earnings (mostly from oil) and savings that can be spent for any public purposes the Legislature chooses. Unrestricted revenue has traditionally come from several sources, but has predominantly come from oil revenues. Unrestricted revenues are the primary focus of the Legislature during the budget process, and they are the subject when legislators talk about the deficit. In fact Alaska can’t constitutionally have a deficit (spending borrowed money), but rather runs into revenue shortfalls. The governor and Legislature must balance the budget, so when revenues and savings fall below the cost of government it’s time to turn off some lights and park the snow plows.

Unrestricted savings include the Permanent Fund Earnings Reserve, which can be used by a simple majority vote for any government purpose. The other main savings account is the Constitutional Budget Reserve, which can be used for any government purpose but requires a three-quarters vote in each legislative body, in most circumstances. If the total amount of available funds is less than the previous year’s budget, CBR funds can be drawn with a simple majority vote. That includes revenue, the Earnings Reserve the CBR and the Statutory Budget Reserve – which is currently dry as a bone. Right now revenue is more than $3.6 billion below the previous budget, but there is still about $7 billion in the ERA. The three-quarters CBR rule will be in effect. However, should the majorities choose they could use the ERA to balance the books this year with just a simple majority vote. It’s an unpopular political move, but it remains one possible solution to the deadlock that seized the Legislature last year.

Short of a gift from a rich uncle, those are the sources of money available for appropriation.

HOW IT’S SPENT

The intended relationship between the legislative and administrative branches is critical to understanding how the budget process is supposed to work. The branches of government are intentionally separated by a distribution of powers and functions. For the purposes of running the government, in the most general sense, the Legislature is tasked with funding the operation of government and the Administration is tasked with managing those funds to operate the government and achieve its stated goals and missions. The governor’s departments and agencies prepare their budgets to that end, and the administration synthesizes that into an overall budget proposal for the Legislature to consider. After examining the performance of each department and agency the Legislature can exercise some discretion over the governor’s proposal and change the budget to express its own vision for how the state should operate. Once the Legislature has battled to an agreement it submits the revised budget back to the governor who can remove items, but not add new items, and can either approve or reject the Legislature’s revisions to his budget. When it comes to revising the budget, the Legislature must work within certain limitations. As mentioned above, the Administration and the Legislature are mostly working with the UGF portion of available funds. The DGF, by definition, are already accounted for and effectively spent.

Appropriations vs. Allocations

The Administration submits its budget broken down by department. Each department breaks its needs down according to specific functions, and those categories are called appropriations. An appropriation must meet five requirements – purpose, funding source, amount, location and timeframe. In many cases the general category of an appropriation can be broken down into sub categories, called allocations. For instance in the Department of Education and Early Development budget one appropriation is called “K-12 Support.” Under that appropriation are three allocations: Boarding Home Grants, Youth in Detention and Special Schools. The sum of the three allocations add up to the total appropriation.

What’s important about that is a department may move money around between allocations, but not between appropriations.  Another appropriation under DEED is “Education Support Services.” If the Legislature reduces funding for K-12 support, the Department may not shift money from Education Support Services to K-12 support to make up the difference. It can only shift money between the three K-12 support allocations to try to manage the shortage.

Some departments use multiple appropriations and allocations. Others have fewer. At the far end of the spectrum is the University, with one appropriation and no allocations, thus enjoying complete discretion over the allocation of those funds. Having multiple appropriations and allocations gives the Legislature somewhat more control over how a department spends its money, and, to some degree over the department’s priorities. The Legislature can reduce or eliminate an entire appropriation forcing a department to reorganize its priorities by shifting money between allocations. Those are called unallocated reductions. The Legislature could also choose to dig down deeper and reduce or cut an allocation amount – an allocated reduction. The Legislature can even create an allocation within a larger appropriation.

There are different schools of thought regarding allocated vs. unallocated cuts. It’s important to note that though the Legislature can reduce or eliminate an allocation line, such a move serves more as a record of legislative intent, rather than as a binding commitment. The department could still shift money between allocation lines to continue a program or service it deems critical. Some legislators say they prefer unallocated cuts to give flexibility to departments in terms of how the money is spent. That can present a problem for the Administration in extremely lean times such as the state finds itself in now. When departments have already been deeply cut, each additional cut, allocated or not, is programmatic – it requires the reduction of elimination of a program or service. In that sense, hitting a department with an unallocated cut can be seen as a signal that the Legislature is shifting the blame for reduced services to the departments. It can be a no-win for a department and the Administration. No matter where the department chooses to cut, some constituency will suffer the consequences. The Legislature could simply say, “We wouldn’t have cut that.” But something had to be cut. Some constituency was going to be injured. When programs are inevitably on the chopping block allocated cuts are a demonstration that the Legislature has actually made the tough choices.

THE PROCESS

Once the governor has submitted his proposed budget to the Legislature it is funneled through a series of steps before the Legislature has a revised product to send back. The operating budget is submitted to both bodies, but in order to maintain some semblance of order the House produces the first revision and sends it to the Senate where it is further revised and then sent back for a concurrence vote. The House rarely concurs with the Senate’s changes, so the budget is then sent to a conference committee consisting of members from both bodies, where it is hammered into a document both chambers can agree upon.

Subcommittees

Because the budget is broken down by department, the House and Senate form a Finance subcommittee for each department. The subcommittees meet to scrutinize the separate departments in detail and then to prepare recommendations to send to the full Finance Committee of each body. The subcommittees generally only consider unrestricted general funds for their recommended changes, and they do not scrutinize the language sections of the budget.

Departmental examinations generally begin with a budget overview presented by administration representatives from the appropriate department. Subcommittees focus on the numbers sections of department budgets – the language sections are analyzed in full Finance Committee. With the fiscal challenges facing the state this year subcommittees began the process earlier than usual, and appear to be digging much deeper into the minutiae of each department budget. While most legislators agree that some cuts are still needed, finding places to make those cuts has become increasingly difficult. Even those who strongly favor operations cuts admit that for most departments those cuts will be necessarily small.

Once each subcommittee has arrived at its recommendations they submit their work to the Finance co-chairs for consideration of the Finance Committee. A Subcommittee report normally includes: 

Once the subcommittees’ substitute bill is submitted to Finance public testimony is taken on the budget, followed by Finance member amendments. Majority and minority members may submit amendments, but minority amendments rarely pass. This year it is less likely that amendments to add money to the budget will pass at all. The final budget is then brought to the floor for passage.

Again, the House typically sends its version of the operating budget to the Senate. The Senate subcommittees may choose to work from and revise the House’s version, or they may simply replace it with their own. Once the full process above has been completed in the Senate the budget is returned to the House for concurrence. Typically the House fails to concur with the Senate changes, and asks the Senate to rescind its actions. Again, typically, the Senate refuses to rescind, and the budget is sent to a joint conference committee where a compromise is hammered out. Finally, the Legislature has a document and transmits it to the governor. The governor has 20 days to review the budget and either reject it, or to exercise his line-item veto power (or not) and then accept the budget.

COMPLICATIONS

If that’s not convoluted enough, there are further complications. By now most Alaskans are familiar with the Constitutional Budget Reserve. It is one of a few savings accounts that can be used to help balance the budget when revenues fall short. There is also the Statutory Budget Reserve, but it’s empty, and the Permanent Fund Earnings Reserve. The CBR can be used to close the fiscal gap, but is subject to rules that, in most years, require a three-quarters vote in each legislative body.

That is not a problem in the Senate where the majority caucus now has 16 members in a 20-member body. Because the majority caucuses are “binding,” meaning members are required to vote as a bloc on procedural matters (namely the budget), once the Senate majority agrees upon a budget it’s a done deal on the floor. In the House, however, the minority has 13 members, enough to block a CBR draw. This is a powerful negotiating tool for the minority, enabling it to negotiate some of its priorities back into the budget.

Last session’s budget logjam snagged on that very issue. The House minority caucus established a list of priorities and stood firm on most of them until a compromise could be reached. In the end some minority priorities had to be jettisoned, and most of what remained were in the form of one-time budget changes. Still, the CBR rule forces the majorities to negotiate with minority caucuses.

A further complication is that no caucus, even a binding one, is a monolith. Last year Rep. Lora Reinbold (R-Eagle River) voted against her own majority leadership on the House floor – choosing to not support the budget. Reinbold felt the cuts didn’t go deep enough. It bought her an invitation to caucus alone. It was a reminder that while, in the end, majority caucuses vote as a bloc on budgets, the behind-the-scenes budget discussions can be contentious. In the House, where the CBR vote is an issue, Speaker Mike Chenault (R-Nikiski) has members that range the entire conservative side of the political spectrum. In order to pass a balanced budget, Chenault must wrangle up 30 votes in the House, and even getting his own 27-person caucus to agree can be a challenge.

Further complicating things is the fact that, technically, even the House majority doesn’t need the three-quarters vote to balance the budget this year. There is no three-quarters-vote requirement to use any or all funds from the Permanent Fund Earnings Reserve. If negotiations with the minority bog down, the majority could agree to break a gridlock by simply appropriating money from the ERA. While Chenault has said there are “lots of options available,” he also said he would be extremely hesitant to bypass the CBR vote, and said he’s confident a compromise can be reached with the minority.

Finally, this year’s budget process is unusual in that Governor Bill Walker has proposed significant changes to Alaska’s cash flow model. He has proposed some new taxes, use of Permanent Fund earnings and a restructuring of the dividend process. All of those changes are reflected in his proposed budget, but they require statutory changes to become reality. That means the statutory battle and budget battle, though inextricably linked, are being fought separately. Much of the numbers portion of the FY2017 operating budget will depend upon what happens to several bills moving through the legislature this year.

If that doesn’t sound like fun, I don’t know what does.

During the budget process legislators have access to myriad resources from a variety of sources. The public also has access to those resources. Here are a few.

The Alaska Legislative Budget Handbook (Swiss Army Knife Guide to Budgets): This document, produced by the Legislative Finance Division, is the best place to start when trying to understand the process.

Revenue Sources Book: Produced by the Department of Revenue Tax Division, the sources book identifies where the money comes from, and how much there is.

Legislative Finance Division: You could spend many exciting nights exploring the documents at this site. Start out under “Publications” and expand from there. Once you’ve read the Swiss Army Knife many of the reports available here will be helpful and will help make sense of the budget.

Office of Management and Budget: Another bounty of resources. Check out the "Budget Reports" section for detailed reports on the FY2017 and previous budgets. There is another wealth of department-specific information under the "Performance" tab.