As the special session looms, Alaska can take one of three paths

Legislators and the Dunleavy administration have made progress in talking about the State of Alaska’s large structural deficit, but there is no guarantee that the special session beginning next week will produce a big fix. We could learn a lot in the first half of next week when the legislators begin meeting in Juneau.

Let’s review the problem before detailing the current state of play. Under current law, the deficit is more than $2.3 billion in fiscal year (FY) 2022, $1.9 billion in FY 2023, and $1.3 billion every year from FY 2024-2030.

These projections come from the Comprehensive Fiscal Plan Working Group, a bipartisan and bicameral special committee of legislators. The Working Group has worked over the past month to scope out the problem and trade ideas on solutions in advance of the next special session set to start in Juneau Aug. 16.

We should thank those lawmakers who took on the important task of serving on the Working Group. The House members are Reps. Jonathan Kreiss-Tomkins, D-Sitka (co-chair or co-facilitator); Calvin Schrage, I-Anchorage; Ben Carpenter, R-Nikiski; and Kevin McCabe, R-Big Lake. The Senate members are Sens. Lyman Hoffman, D-Bethel (co-chair or co-facilitator); Shelley Hughes, R-Palmer; Scott Kawasaki, D-Fairbanks; and Jesse Kiehl, D-Juneau.

Good News

There’s good news for those hoping that we can land this plane safely. Eight lawmakers with views all over the map were able to agree on a common set of baseline projections to describe the depth of the problem before coming together to work on a report, which apparently will urge a comprehensive approach to the fiscal crisis.

The second bit of good news is that Gov. Mike Dunleavy has in the last few days made some efforts to come off his rigid “my way or the highway” stance. Those gestures — which I’m sure that he would describe as concessions — include explicit support for revenue measures, including a statewide sales tax, an increase in oil taxes and an increase in motor fuels taxes. The Commissioner of Revenue announced Tuesday that the governor has dropped his previous demand that voters approve the Legislature’s establishment of a tax before the tax takes effect, at least in the case of a statewide sales tax. But the governor contradicted the Commissioner of Revenue by stating to Alaska Public Media in a report released Friday that he would veto any tax measure unless it was accompanied by constitutional amendments, including one that would prohibit the implementation of a tax until the voters approved it.

Finally, the governor also made a move that might be characterized as conciliatory by announcing that he would not appeal a judicial decision that allows funding for the Power Cost Equalization (PCE) program to go forward.

Roadblocks

Along with these positive developments, there are also roadblocks to achieving an end to the structural deficit. These roadblocks are analytical, philosophical and political.

In terms of analysis, while the ideologically diverse members of the Working Group have agreed on the spending and revenue projections that define the structural deficit, not all the players have bought in. The Dunleavy administration has different assumptions that tend to make the deficit smaller in future years, and some legislators may be inclined to go with the governor.

Philosophically, while the Working Group came to agreement on its baseline assumptions about the size of the problem over time, that joint committee has not come to consensus on a particular package of solutions. That lack of agreement might go double for legislators not on the Working Group. Broad agreement is particularly important for the constitutional amendments that are being considered as some of the solutions, given that putting constitutional amendments on the ballot requires two-thirds of each house rather than the usual simple majority.

A particular philosophical flashpoint is the governor’s proposed constitutional amendment to split the Permanent Fund earnings annually 50/50 between Permanent Fund dividends and conventional public services and projects such as roads, schools, and public safety. The question of making that allocation to constitutionally guarantee a dividend looms large both in terms of philosophy and practicality, and it obviously also makes a giant difference what the percentage is in the allocation.

Another issue likely to be fought over is the proposed statewide sales tax and efforts to create one that is less regressive.

The political barriers to a resolution are numerous. Some legislators say that closing the deficit now is unwise because the public is not fully engaged with the fiscal crisis — and maybe won’t be until we go through the campaign ending with the general election in November of 2022. A number of lawmakers seem content to let the State of Alaska’s position deteriorate as long as they think they can avoid blame for that deterioration.

Finally, there is the special role of Mike Dunleavy in fiscal politics. The Alaska Constitution makes our state’s governor probably the most powerful chief executive of any state in the country, but the incumbent has given himself a tough time. To be as charitable as possible, he was excessively optimistic in his statements about the state’s fiscal issues during the campaign in 2018, then staged a dramatic reversal less than four months after the election in proposing big budget cuts that the public and the Legislature rejected. Gov. Dunleavy overplayed his hand this year by vetoing the Permanent Fund dividend to $0 and hurt his reputation further by failing to execute his planned veto of the $4 billion appropriation to the Permanent Fund principal.

The governor has his fans in the Legislature — particularly in the House Minority — but it is striking how many lawmakers of both parties seem to be waiting for a new governor to make structural changes to Alaska’s fiscal system.

Three paths

Three paths are possible this year: do nothing (also known as Scenario Zero); a one-year Band-Aid; and a big fix.

Scenario Zero means the Legislature taking no action. The purest form of doing nothing would be if the Legislature gaveled in Monday and then immediately gaveled out. Although there was speculation last week that this would be the outcome, more recently talk has been that lawmakers will take the temperature in the first 48 hours of the special session and then adjourn Aug. 23 if it appears that no agreement is possible.

The one-year Band-Aid would be only addressing issues pertinent to fiscal year 2022. (Calling this approach a “Band-Aid” is a reference to its temporary nature, not the importance of the issues involved.) Taking this tack would mean dealing with the governor’s vetoes and the problems associated with the failure of the reverse sweep vote earlier this year. One problem with this approach is the governor’s decision not to put an appropriations bill in the call for the special session.

The big fix would be one or more major changes to spending and/or revenues put in the statutes (or the Alaska Constitution) that would eliminate the structural deficit. I confess that I felt more confident about a big fix this year back in May, when the governor issued the first special session proclamation, than I do now.

There is speculation that if the Legislature does not make a big fix during the special session starting Monday, no big action to end the structural deficit will happen until after the general election in November of 2022.

I am going to Juneau for the special session. Keep your fingers crossed, and I will keep you posted.

Cliff Groh has studied Alaska’s fiscal system over the past four decades, and his work has included service as the legislative assistant who worked by far the most to develop and get passed in 1982 the bill that created the Permanent Fund dividend.

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