What others say: Reserve funds transfer would hurt state’s future fiscal options

  • Wednesday, May 27, 2015 4:36pm
  • Opinion

Necessity, according to the old saying, is the mother of invention. With the necessity of a state budget passed before July 1 bumping up against deadlock in the Legislature, the Republican-led majority caucus has despaired of reaching a deal with minority Democrats and has begun exploring alternate methods of funding state government that don’t require votes of members outside of their own caucus. The virtue of compromise over partisanship aside, the majority’s latest plan to achieve its members’ preferred budget could endanger the state’s options to deal with budget deficits in future years.

The easy way to fund state government is to draw from general fund revenue — money that comes in each year from leases of oil and mineral rights, oil production revenues, license fees and so forth. But when those revenues are insufficient to cover the cost of government, as is the case this year, the method of funding state operations gets more arcane.

The state has a few “rainy-day” accounts upon which it can draw in such cases. The good news for legislators is there’s money in the accounts to help keep the state afloat for at least a few years — mostly in the $10.1 billion Constitutional Budget Reserve fund. The bad news, at least for the majority caucus, is that the CBR requires a three-quarters vote by the Legislature to access, which means at least some of the Democratic minority members must sign off on the budget for it to be funded with money from the reserve.

Discussions on any kind of a budget compromise between the legislative caucuses have been unproductive, to put it mildly. In a rancorous special session, majority members spiked the minority caucus’ biggest priority, Medicaid expansion. Members of the two caucuses also engaged in a war of words over which budget vision was more responsible — Democrats want to reverse some education cuts and state employee pay freezes and cut money allocated to construction megaprojects such as the Knik Arm bridge and the Juneau road, while the Republican-led majority prefers the opposite.

Majority leaders have evidently given up most if not all hope that they will reach a budget compromise. Last week, they floated a plan that would allow them to access CBR funds by a majority vote — bypassing the need for Democratic support — by changing the balances of other reserve funds.

The CBR can be accessed by a simple majority in one specific case: when the balance of all reserve funds, the CBR included, fall below the previous year’s total budget. The combined operating and capital budgets came to $12.2 billion last year, which would mean that nearly every reserve fund other than the CBR would need to be drained. Chief among these is the Alaska Permanent Fund earnings reserve, out of which the state’s much-beloved dividend checks are paid each year.

Though it might be spun as a “raid on the permanent fund,” the majority’s proposed transfer of earnings reserve fund into the body of the permanent fund would be somewhat the opposite. Legislators would take $5 billion in the reserve, most of the available money in the account, and transfer it to the body of the permanent fund, where it would receive constitutional protection from year-to-year spending.

But that doesn’t mean the transfer is a good idea or that dividends couldn’t be affected. Moving $5 billion into a place where it couldn’t be used to help the state fulfill its budget obligations would greatly restrict the Legislature’s ability to deal with deficits in the future, as that money constitutes roughly a third of the money available to the state without drastic changes to Alaska’s revenue streams or laws.

Potentially more concerning for Alaska voters, reducing the permanent fund earnings reserve to near zero introduces another negative. Were this year’s permanent fund performance poor a result of market downturns, the body of the fund might not earn enough revenue to allow for the payment of dividends in 2016, regardless of the fact that dividends are supposed to be based on a five-year rolling average return. One needn’t be a political scientist to understand that if residents didn’t receive dividends in 2016 because of the move, legislators up for election would likely be ousted en masse.

The risk that Alaska would be exposed to if the legislative majority follows through on its plan is far too great to justify. It’s time for both caucuses to head back to the negotiating table.

— Fairbanks Daily News-Miner,

May 24

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