The clock is ticking. Unless the Legislature passes an appropriations bill for Fiscal Year 2018, state government shuts down on July 1 – 18 days from today, Tuesday.

The Legislature’s game of chicken continues in Juneau, although the House-Senate conference committee on the budget will meet today, June 20, at 3 p.m. The first special session concluded Friday, at the end of its 30-day limit, and Gov. Bill Walker immediately called a second one, which can last another 30 days. The problem is that July 1 comes first and if the Legislature has not yet passed an operating budget by then, the state has no authority under the state Constitution to spend money. As we write this the state Attorney General is working to develop a legal rationale for certain emergency services to be continued, such as prison guards, state troops, and staff at the Pioneers’ Homes. All this is unprecedented in Alaska but in other states the courts have stepped in with orders to the executive and legislative branches to provide certain services, so it seems likely that would happen here.

There is the possibility that if a budget is adopted, but without an effective date clause that the state could borrow funds against the future effective date and then repay it. The government could then function for a short time, but would not be fully funded without the three-quarter vote needed to draw cash from the Constitutional Budget Reserve to fully fund a budget. Absent the three-quarter vote on the CBR funding would have to come from the Permanent Fund earnings reserve. We hear as much as $5 billion may be drawn from the Permanent Fund reserve.

We have an uncomfortable game of brinksmanship here, and it is making many businesses nervous. Banks and real estate firms are becoming very concerned, for example, about the state recorder’s office being shut down even for a few days because of the effects that could cause on real estate and financial transactions. Seafood companies and harvesters, now fully mobilized for the summer salmon season, are worried about state biologists being kept in the field to regulate fishing openings and closures.

It’s likely, we believe, legislators will fulfill their sole constitutional responsibility, approving a budget, by July 1. But this is getting too close for comfort. Two years ago when a similar impasse developed the Legislature partially-funded a budget, so there was no real emergency. There is no similar fallback this time.

Fireworks in the House last Thursday

Meanwhile, there were plenty of fireworks in the state House last Thursday evening as the end of the first special session (Friday) approached. The House Majority voted to roll its version of the operating budget, with some modifications, into the state capital budget bill, which had already passed the Senate. People gasped at the audacity of this but we’ve seen things like this happen in years past.

The House Republican minority raised a ruckus, of course, all which can be viewed on Thursday night’s Gavel-to-Gavel (the Legislature’s C-Span) coverage if any of our readers are interested. Ruckus or not the House majority has had to ride on a one or two vote-margin all session (21-19 or 22-18). As far as the game of blame goes, the House minority was never helpful.

Procedurally, this set up a scenario where the Senate could just concur on the House amendment (addition of the operating budget) and the deal would be done. The Senate didn’t do that, of course. As the special session ended all the bills pending, including the Permanent Fund earnings restructuring and the proposed new broad-based revenue measure, a lump-sum annual tax (a “head” tax) linked to income brackets, died. The lump-sum tax being considered was Sen. Click Bishop’s SB-12, which was never really by the Senate.

The governor has so far introduced one item in the second special session, the operating and capital budget, so legislators can act only on the budget. The Legislature is now under the gun to deal with the single issue before it, the budget. No revenue measures are formally before the Legislature although the governor can add these.

What precipitated the House Majority action?

In a Friday morning briefing, House Speaker Bryce Edgmon and other House Majority leaders said their action the previous evening, which came at little notice, was precipitated by the collapse of informal negotiations that had been underway with the Senate. Edgmon said the House Majority had “substantially” lowered its demands for new revenue from a broad-based tax from the approximate $700 million the proposed income tax would have brought to a lower figure, which the Speaker didn’t specify.

Chris Tuck, the House Majority Leader who was also in the briefing, said the House Majority was willing to let the Senate choose the instrument of a new tax, for example Sen. Bishop’s “head” tax instead of the House-passed personal income tax.

Edgmon said the House also accepted some of the Senate budget, for example lowering the University of Alaska general funds appropriation from $325 million (House budget) to around $312 million, but not down to the $302 million in the Senate budget. The House Majority held firm against the Senate’s cut to school K-12 funding, however.

Even on Thursday morning some senators involved in the discussions (since these were private, we don’t know who) seemed open on these matters, Edgmon said in the Friday briefing. But then the word came down from the Senate’s leadership (presumably Sen. Pete Kelly, Senate President) that the Senate would stonewall any new tax revenue source.

The Senate had, of course, passed SB-26, the bill allowing some Permanent Fund earnings to be used for the budget, so senators were open to at least these new revenues for the budget. However, faced with the stiffening of the Senate position against a tax of any kind, Edgmon said House leaders felt they should at least get the operating budget into a position where it could be enacted quickly. That prompted the move to stuff it into the capital budget.

Most meetings on the budget are informal, behind closed doors

All through this, of course, there had been a few meetings of the formal House-Senate budget conference committee. Budgets for several departments were closed out, although big items like education and the university were being held. The Thursday House-Senate discussions Edgmon described were all held informally, behind closed doors.

Some seasoned legislative observers (i.e. veteran lobbyists) say the House may be in an awkward position because it wants something (a new tax) and all the Senate has to do is continue saying no. House members recognize, however, that there is nothing to keep the Senate from playing the same game next year. There is really no ability to negotiate if there is no intent to do so on one side, meaning the Senate.

Meanwhile, July 1 is now approaching and if the House balks now at approving the budget without a new revenue source (the Senate seems okay with that) the House Majority could take the principal blame for the shutdown, if it happens. A budget without new revenues of any kind will further strip state cash reserves and we should expect a strong reaction from the credit rating agencies.

However, it’s also possible the House Majority may agree to the Senate’s SB-26, the Permanent Fund earnings restructuring, which would make about $2 billion in new revenues available for the budget, sharply lowering the deficit. The House, it will be recalled, did pass its own version of this in HB 115, although that had the income tax included and the bill died in the Senate.

Oil taxes – another twist in the tangle

The oil tax impasse adds another twist to this tangled knot. Basically, the House version of HB 111, the oil tax bill, ends the state tax credit payouts but also raises taxes on the industry. The Senate version of the same bill also ends the tax credits but makes no tax increase, at least not a significant one. Some version of this has to be in the final mix because all legislators agree that the tax credit payouts must be finally wound down.

Last year’s HB 247 accomplished most of the wind down but there were some issues left, which is why the Legislature is again dealing with it. The new angle this year, however, is that the House Majority wants to raise taxes on oil, and the Senate Majority flatly opposes it. There are some hard-liners on this within the House Majority caucus, such as Rep. Les Gara and Rep. Geron Tarr, and there are equal hardliners against it in the Senate, such as Sen. Cathy Giessel.

So, in sum we have the Senate as a hard-liner opposing new taxes, the House being hard-line in favor of new taxes, and a similar kind of standoff on oil taxes. The way this is going it’s hard to foresee a three-fourths vote for the CBR in the House, which means drawing on earnings reserves of the Permanent Fund.