PHOENIX- Alaska's legislature passed a budget with a $3.2 billion draw on the state's Constitutional Budget Reserve after rejecting fiscal reforms urged by Gov. Bill Walker.
The legislature passed a fiscal year 2017 budget May 31, just in time to prevent a government shutdown but including none of the fiscal reforms or revenue measures Walker had urged.
Rating agencies have said Alaska needs to reshape its revenue system to prevent future downgrades.
In January S&P Global Ratings dropped its rating on Alaska's general obligation debt to AA-plus from AAA, while downgrading its appropriation-backed debt to AA from AA-plus. In February, Fitch Ratings placed Alaska's AAA rating on a negative watch, and Moody's Investors Service downgraded the state to Aa1 from Aaa on March 1.
The latest budget, which Walker has not indicated whether or not he will sign into law, officially draws $3.2 billion from the reserve but does not factor in more than $600 million of reserve spending booked into fiscal year 2016. Walker had advocated a wide-ranging series of reforms called the "Sustainable Alaska Plan" which looked to use a variety of means to counter the effects of severely diminished oil royalty revenue. The plan includes using Alaska's $50 billion dollar Permanent Fund, which has until now been used to send annual checks to Alaska citizens, to help close the budget gap, along with a new income tax and new or increased taxes on mining, fishing, tourism, fuel, alcohol, and tobacco.
Walker said the spending plan lawmakers adopted will drain the budget reserve to less than $3 billion by the end of fiscal 2017. In a press conference Wednesday, he stressed the need for the state to change course.
"We can't continue with business as usual," Walker said, noting that the legislature has raided the budget reserve in the past. "That is not the answer," Walker said.
The oil tax revenue that has propped up the state government for years, allowing it to forgo general taxes on citizens like an income tax or state sales tax, has diminished due to falling oil prices and declining production in the state.
Gabriel Petek, an S&P analyst, said his agency is keeping a close watch on the situation in Alaska and has a negative outlook on the state's credit.
"They are spending down their budget reserves at a rapid rate," Petek said, adding that Alaska will certainly need to take the sort of wide-ranging reforms suggested by Walker's administration if it is to get its fiscal house back in order.
"It's fraught with difficult choices," said Petek.
Petek added that if Walker does sign the budget, he might be making the road to his preferred reforms more difficult by giving in to the legislature.
"If he signs it into law, I think he loses some leverage," Petek said.
Legislative leaders defended the budget, pointing to some $400 million in spending cuts compared to fiscal 2016.
"This budget did not use smoke and mirrors to artificially show cuts to the budget," said Sen. Pete Kelly, R-Fairbanks, co-chair of the Senate Finance Committee. "In fact, one of the challenges we had in constructing this year's budget was overcoming the smoke and mirrors that were built into the budget the administration gave us in the first place. We delivered a straightforward budget for the people of Alaska, which made actual cuts to state government."
Alaska's lawmakers are in the midst of a special session which Walker called last month in the hopes of passing some more meaningful financial reform legislation.
