Hope for a comprehensive fiscal plan for Alaska appears to be fading

JUNEAU — Alaska lawmakers appear increasingly likely to skip over long-term reforms to end the state's deficit crisis as they try to finish their annual spending plan before the state government would shut down July 1.

"Political realities may not allow for a comprehensive plan. It may be that we just have to continue working piecemeal toward a plan over a long period of time," said Mike Navarre, the Kenai Peninsula Borough mayor who's been lobbying for long-term fiscal reforms.

While a shutdown wouldn't start until July 1, lawmakers are facing growing pressure to meet an earlier deadline of Friday, the final day of a 30-day special session convened by Gov. Bill Walker. The governor called the Legislature back to Juneau after it failed to agree on a spending plan or on measures to close the state's $2.5 billion deficit.

Members of the Republican-led Senate majority have been pushing to pass a one-year budget that would have the effect of adopting their primary proposed structural reform: using earnings from the $60 billion Permanent Fund to pay for government services, a move that would also reduce Alaskans' dividends.

The Senate also passed separate legislation, Senate Bill 26, to divide the fund's earnings between government services and dividends — and both the House and Senate wrote their annual budgets assuming that some version of that legislation would pass.

But the largely-Democratic House majority has so far refused to approve SB 26 by itself, saying that the legislation, by reducing each Alaskan's dividend by an equal amount, would hurt poor people disproportionately — and would also leave the state with a continuing deficit of hundreds of millions of dollars.

Instead, House majority members have conditioned their support for SB 26 on the passage of an income tax — which would ask more of higher-income Alaskans — and increased taxes on oil companies, which Senate majority members have opposed. They've also said they don't want to pass the annual budget unless it's part of a broader fiscal plan.

The impasse has dragged on for nearly five months, with Walker's administration last week warning of a huge array of impacts if lawmakers can't agree on a budget by July 1 and the state government shuts down.

But on Monday, one House Democrat, Scott Kawasaki of Fairbanks, suggested a new willingness to accept an annual spending plan without the additional measures.

"I think we'd have to have some assurances from the majority in the Senate, and the Senate leadership, that we are still going to continue down the road of looking for some sort of complete plan. And if we've got those assurances from leadership — that they're willing to compromise and just can't do it at this time — then I think that's fair," Kawasaki said. "We don't want to see a shutdown this year."

He added: "I came down here wanting a complete plan. And I don't think we're anywhere near that now."

A spokeswoman for Walker, who's been pushing for broad budget reforms for the past two years, declined to comment Monday. House majority leaders also declined to comment.

The University of Alaska's lobbyist, Miles Baker, said in an email to university employees that progress was being made.

"Over the last several days there has been significant movement on the operating and capital budgets, which are the only pieces of legislation that must pass in order to ensure state government is funded for the next fiscal year that begins July 1st," Baker wrote.

Though the prospects for SB 26, the income tax and oil tax measures appeared to grow increasingly dim Monday, some lawmakers have echoed Baker's comments and said they have had promising discussions about next year's spending plans.

The House Finance Committee on Sunday approved a new version of the supplemental and capital budget, amending a proposal already passed by the Senate. It would sharply reduce cash subsidies the Senate had set aside for oil companies — to $40 million from $288 million — while budgeting $7 million for school construction in the Northwest Alaska village of Kivalina and keeping $50 million in an account for the state-sponsored natural gas pipeline project that the Senate wanted to use for troopers, plowing and prosecutors.

The House's goal is to pass an updated version of the bill that the Senate will also approve, avoiding the need for a conference committee to resolve their differences, said Rep. Neal Foster, D-Nome and co-chair of the House Finance Committee. If that happens, it would be a rare show of cooperation between the two chambers, which have clashed over spending and fiscal policy since the start of the session in January.

"I never want to make promises. But we're trying to avoid going to conference, and as far as I know, I think this gets us there," Foster said.

Lawmakers canceled a Monday afternoon conference committee hearing on the much-larger operating budget, though another is scheduled for Tuesday. Senate Majority Leader Peter Micciche, R-Soldotna, said that "both sides seem to be negotiating in good faith, with a focus on wrapping this up in this special session."

Finishing the operating and capital budgets by Friday, however, would still require bridging some major divides between the House and Senate majorities. The 18-member Republican minority in the 40-member House could be a factor, too, if the final budget deal relies on cash in the Constitutional Budget Reserve — a key state savings account that requires a three-fourths vote of each chamber to crack. (The Senate majority, with its 14 members in the 20-member chamber, could tap the account without minority votes by enlisting an ally, Wasilla GOP Sen. Mike Dunleavy, who left the majority earlier this year but still backs most of its positions.)

The two chambers would have to agree on whether to approve the 5.7 percent cut to schools and a similar reduction for the state university system proposed by the Senate — or to leave last year's spending levels intact, as proposed by the House.

They would also have to decide whether to set aside $693 million for Permanent Fund dividends, as proposed by the Senate, or $794 million, as proposed by the House. The extra cash in the House budget, split between last year's 636,000 dividend recipients, would add about $160 to the roughly $1,000 that would be paid out under the Senate proposal.

Then there's the question of how soon — or even if — the Legislature would reconvene to reconsider longer-term budget reforms.

Economists and business leaders have been urging lawmakers to adopt a durable plan that won't need to be revisited year after year.

House majority members have argued that their fiscal plan — with income tax and oil taxes — would do that by balancing the state budget within a few years.

If those measures don't pass this year, lawmakers would end up using hundreds of millions of dollars in state savings — though Senate leaders say that can be sustained for decades, with the more than $3 billion projected to be left in the Constitutional Budget Reserve at the end of the month.

Micciche, the Senate majority leader, said that business leaders and credit ratings agencies should be encouraged if lawmakers pass a one-year spending plan that includes Permanent Fund investment earnings — even if they don't pass a broader framework to guide the use of those earnings in the future.

The Permanent Fund's investment earnings, in fact, have long been known as the third rail of Alaska politics: Touch it and get fried at the ballot box. And the earnings reserve account, Micciche pointed out, has never been used for state spending before — instead being left entirely for dividends.

"If that's what happens this year, we should be discussing that with every ratings agency on the planet — that we have made a move that has not happened in the past," Micciche said. "It doesn't mean we're not willing to sit down and talk about other issues in the future. But we've run out of time."

Correction: An earlier version of this story said the Senate majority has 15 members. It has had 14 since Sen. Mike Dunleavy, a Republican from Wasilla, left the caucus earlier this year.