OPINION: Alaska has made progress toward righting its financial picture

The State of Alaska’s financial outlook is not entirely negative. Serving as a volunteer commissioner on the State of Alaska Municipal Bond Bank since 2008, I have engaged with all major credit rating agencies, including Fitch, S&P, Moody’s and Kroll. The primary objective of these interactions has been to secure the most favorable and realistic credit ratings possible. Achieving this goal is crucial, as it directly contributes to minimizing the interest rates on general obligation bonded debt. This financial prudence directly benefits Alaskans, particularly those in communities and rural health entities that utilize the bond bank.

Moreover, a strong credit rating does more than just lower interest rates. It offers a thoroughly analyzed perspective on the future economic outlook of the State of Alaska. This analysis is a valuable tool for investors considering the allocation of substantial capital investments in state projects. Thus, maintaining a good credit rating is a strategic measure that underpins both fiscal responsibility and economic development in Alaska.

I’m concerned about the perception of our state’s finances and economic outlook due to static, mandated fiscal reports like the 10-year forecast. A significant source of the problem lies in the rigidity of a few of our statutes mandating static reports which do not consider reality. Alaska Statute 37.07.020(b)(2) requires that the state “must balance sources and uses of funds held while providing for essential state services and protecting the economic stability of the state” which is the guiding light for the 10-year forecast. Also required, AS 37.13.145(b) states that: “At the end of each fiscal year, the corporation shall transfer from the earnings reserve account to the dividend fund established under AS 43.23.045 , 50% of the income available for distribution under AS 37.13.140 " which drives the projected “statutorily defined” permanent fund distribution in the 10-year forecast. The result is a significantly misleading 10-year forecast; especially given what has occurred in the past decade.

In 2016, an impactful decision by Gov. Bill Walker to veto half of the funds allocated for the Permanent Fund dividend, which had been approved by the state Legislature, led to significant legal and fiscal implications. Sen. Bill Wielechowski initiated legal action, challenging the veto on the grounds that it contravened the constitutional amendment which established the Permanent Fund. He contended that funds dedicated to the Permanent Fund dividend should be immune to gubernatorial veto. However, Anchorage Superior Court Judge William Morse upheld the governor’s veto, stating that any alteration to the governor’s veto power necessitates explicit and formal legislative action.

Without a statute change, the governor is mandated to include a “full” dividend in the state budget forecasts, a requirement that constrains the presentation of a balanced budget meeting the requirements of AS 37.07.020. It is, therefore, prudent for the Legislature to consider amending the statutory language governing the Permanent Fund earnings distribution language. Such an amendment would grant the governor greater leeway to formulate more realistic budget forecasts that are aligned with projected balanced budgets. This change is crucial for fostering transparent communication with the public regarding the state’s financial outlook, considering the necessity for the governor and legislators to balance actual income against expenditures.

The current fiscal situation of the State of Alaska must be realistically presented to the public in context of the past decade. The state’s 2013 unrestricted operating and capital budget stood at $7.9 billion, which declined to $4.5 billion in 2017 and 2018, and is estimated to be approximately $5.2 billion by 2025. This represents a significant decrease of 34% in unrestricted revenue over the past decade. Consequently, the state has struggled to meet its operational needs as per AS 37.07.020(b)(2) and unable to disburse a “full” dividend in line with current statute language (AS 37.13.140).

The reality is that the past Legislatures and governors have ultimately made significant cuts in the past decade and adopted the percentage-of-market-value, or POMV, rule in 2018 and implementing it 2019, with a 5.25% subject to appropriation draw through 2021 and 5% thereafter. As a result, dependence on the projected petroleum revenues has decreased from more than 80% of the state’s budget in the past to 16% of the state’s projected 2025 total budget and 33% of the state’s 2025 unrestricted general fund budget. POMV has proven to be very effective in stabilizing state revenues in the past five years and combining the earnings reserve account with the corpus account with an “up to” draw of 5% for future legislators will add even more stability for Alaska’s fiscal future.

The State of Alaska’s current financial situation reflects a stable position, attributable in part to substantial budgetary reductions and the imposition of a cap on the growth of state agency expenses at less than 2% per year. This fiscal discipline is evident when comparing the fiscal year 2019 state agencies’ expenditure of $3.95 billion with the projected budget for fiscal year 2025, which stands at $4.32 billion. Additionally, the state’s fiscal health is bolstered by the full funding of Public Employees’ Retirement System and Teachers’ Retirement System obligations.

Moreover, the state’s total debt service to maturity, inclusive of school debt reimbursement, is less than $1.5 billion. Notably, more than 71% of this debt is scheduled to be repaid within the next 10 years. This scenario underscores the state’s effective management of its financial obligations and its commitment to maintaining a robust fiscal framework.

Fiscal debates and discussions about expense priorities are vital components of good governance. Annual discussions are key to creating accurate, realistic, and transparent financial reports and projections. It is important that the fiscal documents conform to both the wording and the spirit of state statutes. My recommendation is for legislators to amend statutes related to the Permanent Fund dividend distribution during the current session and to enhance the accuracy of the 10-year forecast with associated financial reports.

Luke Welles is the chairman of the Alaska Municipal Bond Bank Authority’s board of directors. He formerly served as the Senior Director of Business Development & Strategic Partnerships for the Alaska Native Tribal Health Consortium and, prior to that, Vice President of Finance for the Arctic Slope Native Association.

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