The state’s recession appears to be leveling out with even a small growth in employment (see page 1) but the uncertainties over the state budget are causing anxieties in local government and are un- settling to business leaders who would otherwise be pleased at the firming of job numbers. Basically, here is what is happening: Oil revenues are rising modestly and shrinking a deficit that had been projected. A state budget with modest reductions could fit within existing revenues and allow for a Permanent Fund dividend, or PFD, in the range of $1,200. Gov. Mike Dunleavy has promised voters a $3,000 dividend, however, which would result in a $1.6 billion deficit. The governor proposes a series of drastic budget actions to cover the gap and allow for the large PFD. The actions include about $600 million in reductions to state agencies, a curtailment of state school bond assistance to municipalities and what amounts to a confiscation by the state of industrial tax base of several local governments and denying coastal communities a 50 percent share of fish tax revenues. If these were to actually happen the finances of several communities would be decimated. However, many of the governor’s proposals won’t happen because legislators, who must change statutes, are refusing the governor’s requests. The House has largely rejected Dunleavy’s plan when it passed its version of the operating budget, and the Senate appears headed in the same direction as it finalizes its budget.

Big PFD as a compromise?
What about the dividend? The House did not put a PFD in its budget, preferring to negotiate this in a separate bill. The appropriation can be made either in a bill or in the budget. The Senate, in a surprise move, put a $3,000 PFD in its budget. Now having given sanction to the governor’s amount for the dividend it may be politically difficult for legislators to walk back the number. It is possible this may be part of a ploy to get the governor to wield his veto pen lightly. Dunleavy has the power to reduce spending through the veto but he cannot make an appropriation, such as for the PFD. That is the tension: Dunleavy can reduce the budget but only the Legislature can give him the dividend at the amount promised to voters last fall. If the Senate Finance plan, basically a budget with some cuts and a $3,000 PFD, were to actually prevail, it would push the required draw from the Permanent Fund’s earnings reserve account above the 5.25 percent-of-market-value limit set in last year’s Senate Bill 26. In would actually push the draw to between 6.3 percent to 6.5 percent, according to estimates. This wouldn’t say much about Alaska’s financial credibility or willingness to stick with fiscal discipline, but it would be a (typical) maneuver out of a political problem created by the governor’s promise on the PFD.

How will all this end up? The Legislature’s required adjournment is mid-May although there is a provision for a short-term extension. There could yet be a battle over budgets and vetoes, and the governor’s proposals for constitutional amendments are controversial. He has also put a lot at stake in criminal justice bills, some of which are being resisted. How all this will play out is uncertain. A further problem is that a $3,000 dividend this year means a big dividend next year, an election year. This further pressures any stabilized draw from the Permanent Fund earnings reserve. A sense of a durable fiscal plan is pretty much out the window.