JUNEAU — The director of the Legislative Finance Division laid out a sobering picture of the state’s budget outlook Thursday, saying the economic impact of cuts needed for a sustainable state budget would be far worse than the crash Alaska saw in the 1980s.
David Teal made the comment in speaking to the challenge in focusing on cuts to achieve a sustainable budget.
Teal delivered an interactive lunch-time presentation Thursday showing the potential impact a range of scenarios — including oil prices, spending levels and new taxes on Alaskans — would have on the budget and reserves. While Teal has said it’s virtually impossible for the state to cut its way out of its budget situation, the focus in Juneau this session has been on cuts, or getting the state’s fiscal house in order as lawmakers and Gov. Bill Walker have referred to it, before looking at additional revenue sources.
The state Revenue Department last fall projected unrestricted general fund revenues of $2.2 billion for the upcoming fiscal year. To limit spending to that amount, the state would have to cut $1 billion from programs like Medicaid, education, debt service, retirement system payments and oil and gas tax credits — plus eliminate agencies and non-formula programs, Teal’s division wrote in a report earlier this year.
On Thursday, Teal noted that spending cuts, taxes and other options exist for legislators in efforts to reclaim budget solvency.
He said the model used Thursday wasn’t predictive, and House Finance Committee co-chair Steve Thompson, R-Fairbanks, said the alternatives used shouldn’t be seen as ideas being advocated.
But the presentation highlighted the huge challenge in tackling the state’s projected multibillion-dollar deficit, a deficit exacerbated by low oil prices. Depending on spending levels and oil prices, the state’s constitutional budget reserve could be depleted within the next few years. Another easier-to-access reserve fund is expected to be depleted this fiscal year.
Those aren’t the only source available to lawmakers; other options include endowment funds and the Alaska Permanent Fund’s earnings reserve account, the pool from which annual dividends for most Alaskans are derived. Lawmakers also could revisit the oil tax issue, something Democratic Rep. Les Gara and Sen. Bill Wielechowski brought up in interviews after Teal’s presentation. The Republican-controlled Legislature has shown no interest in that and Walker, who as a candidate supported efforts to repeal the current tax structure, said this week he has no plans right now to re-engage in that debate.
Depending on spending and oil prices and production, the timeline for a decision on filling the budget gap could be pushing up hard against the potential depletion of the constitutional budget reserve. Any proposal to raise or implement new taxes or impact the dividend is likely to need some level of buy-in from the public. And implementing any new tax, if lawmakers go that route, will take some time.
Alaska currently does not have a personal income or state sales tax.
For sense of scale, as part of the tax discussion, Teal said a tax based on 10 percent of a person’s federal tax liability would generate $300 million a year. A one-percent sales tax would generate about $100 million. When Teal plugged in a hypothetical change in the motor fuel tax to 24 cents a gallon — a threefold increase from the current level — a bar indicated projected state revenue barely budged.
“It’s scary,” Thompson said in an interview after the presentation.
He said he is encouraging fellow legislators to attend community meetings and share with constituents details about the state’s budget situation and where things are headed if the state doesn’t come up with alternatives. Subcommittees, during the interim, will be asked to continue to look for efficiencies with agencies, ways in which services could be delivered differently and at the impacts the cuts made this session are having, he said.
Cuts proposed this year were painful and next year won’t be any easier, he said.