#AKbudget| The FY 2015 end game (and its not looking good) …

Fiscal CliffAs this year’s regular legislative session enters its last few days, the outlines of the final FY 2015 budget are becoming clearer, and its not good for those concerned about Alaska’s future.

To bring readers current, the Governor started the bidding in December with an initial proposed budget advertised as $5.6 billion (in unrestricted general fund spending). That number, however, did not include a contribution toward the state’s retirement obligation (PERS/TRS), which exceeded $.6 billion in FY 2014 and previously was scheduled to be significantly higher for FY 2015, and also didn’t include money to cover so-called “legislative priorities,” the euphemistic phrase used to refer to legislative earmarks inserted annually by legislators in the capital budget for hometown projects.

Subsequently, last month in successive weeks the House, and then the Senate, announced their versions of the Operating Budget. The House included $5.075 billion in spending in its version, and the Senate $5.25 billion in its. Both versions, however, failed to address the PERS/TRS issue and, until today, both also lacked a corresponding capital budget.

Today the Senate Finance Committee released its “CS” (Committee substitute) version of the Capital Budget which begins to help clarify where the legislature is likely to end up on the final budget figure at the end of this session. Against the Governor’s original proposal of $.45 billion, the Senate CS version proposes $.54 billion in capital spending, which, if adopted by the full Senate, will bring the Senate’s total proposed overall budget (still sans PERS/TRS) to roughly $5.8 billion. Once passed by the full Senate, the Capital Budget will return to the House, where House members typically jockey to add more to cover pet projects cut by the Senate or which result from late session lobbying.

The component to be added to cover the PERS/TRS obligation remains in flux. Under the Governor’s proposed “fix” announced in December, another $.5 billion properly would be added to the FY 2015 Operating Budget to account for the PERS/TRS obligation. Continuing business as usual would add something north of $.6 billion (in August last year consultants to the Alaska Retirement Management Board estimated that under the business as usual approach this year’s contribution would be $.975 billion).

Using what appears to be the current Senate version as a base, either approach will result in a final overall FY 2015 budget in the range of $6.3-6.8 billion.

Last week the House Finance Committee proposed an alternative approach to “fixing” PERS/TRS which would drastically reduce current contribution levels to the TRS component, but at the expense of drastically increasing future obligations. Some speculated the approach was cynically designed to make the FY 2015 budget appear artificially low so legislators could claim in the coming election cycle success in achieving significantly reduced spending levels. The Governor subsequently called the approach “immoral”, but it does not yet appear to be dead.

Also outstanding heading into the final days of the session is a possible additional increase to education funding. The original House version of the Operating Budget largely kept education spending flat between FY 2014 and 2015. The Senate version, however, jumps education spending included in the Operating Budget between the two years by 13.7%.

In a late session development, the House now appears to be considering, as part of its omnibus education bill (HB 278), jumping education spending again, leaping past even the Senate’s version. It is unclear at this point where that effort will land in the remaining days of the session, but any additional increase over the Senate’s version will only add even further to final overall spending levels.

In early 2013 the University of Alaska-Anchorage’s Institute of Social and Economic Research (“ISER”) had this to say about Alaska’s fiscal situation:

“Right now, the state is on a path it can’t sustain. … Reasonable assumptions … suggest we do not have enough cash in reserves to avoid a severe fiscal crunch soon after 2023, and with that fiscal crisis will come an economic crash. … What can the state do to avoid a major fiscal and economic crisis? The answer is to save more and restrict the rate of spending growth. All revenues above the sustainable spending level of $5.5 billion … would be channeled into savings.”

Earlier this year ISER revised the $5.5 billion spending level downward to $5.0 billion, but assuming the legislature was able to bring spending under control there was reason to believe the $5.5 billion remains closer to the long term sustainable level.  Based on where the FY 2015 budget appears to be headed, however, holding on to a sustainable level of $5.5 billion increasingly appears to be overly optimistic.

Based on earlier ISER forecasts, in the 2012 elections several candidates running as “fiscal conservatives” claimed to be committed to doing whatever was necessary to reduce spending levels to sustainable levels. In its early days, the Senate Majority Caucus also included “Develop sustainable capital and operating budgets for current and future generations” as one of its top three goals.

Assuming these budget numbers hold up in the final days of the session, those members — and the Senate Majority Caucus — will clearly have failed in achieving those goals.

As ISER’s 2013 report makes clear, on its current path the state is headed toward a “severe fiscal crunch soon after 2023 and with that fiscal crisis will come an economic crash.” From where the process sits at the moment it appears that in the two budgets they have worked since the 2012 election, the Governor and current legislature have failed to change that direction.

That failure deserves to — and likely will — be a significant issue in the upcoming 2014 election cycle.