Is Alaska on the path to an Illinois-type crisis?

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PHOENIX – Alaska is fast approaching the point where it needs to resolve its massive budget deficit, though analysts still believe it the state has a long ways to go before becoming the Illinois of the north.

Alaska Gov. Bill Walker called the state’s legislature into a special session May 18 to try to solve the fiscal problems that have plagued Alaska for years and resulted in downgrades from all three agencies that rate the state. Dependent on the oil industry for an enormous chunk of its revenue, Alaska has been hit hard by persistently low oil prices and has seen its once unanimous triple-A ratings cut to Aa2 by Moody’s Investors Service and to AA-plus by S&P Global Ratings and Fitch Ratings.

The state is now running an almost $3 billion annual budget deficit and relying on its constitutional reserves to keep operating.

Dan Seymour, an assistant vice president and analyst at Moody’s characterized Alaska’s steep operating deficit as extremely unusual, noting that the state is burning through its constitutional budget reserve at a “remarkable rate.” That reserve now stands at just under $5 billion, meaning that without changes it would be depleted within two years.

“It’s an extraordinary imbalance that we haven’t really seen with any other state, and that cannot be maintained at the current rating,” Seymour said.

But the still high rating does suggest that Moody’s believes Alaska will find a solution to its budget woes, rather than being dragged deeper into the morass.

“Our baseline assumption is the state will enact some kind of reform,” said Seymour.

While both the Alaska House of Representatives and the state Senate have proposed ideas to get the state’s fiscal house in order, they were unable to reach agreement before the legislative session ended earlier this month.

The House, where Democrats maintain effective control, had passed legislation that would have implemented a state income tax (there is currently none) which would have begun generating close to $700 million of revenue in 2020. But the Republican-controlled Senate shot that measure down, leading Walker, an independent, to call both sides back to the table in hopes of finding a way to staunch the fiscal bleeding.

“I thank members of the House and Senate for taking positive steps toward solving Alaska’s fiscal challenges,” Walker said in a statement announcing the session. “However, the work is not done. Our state cannot afford to continue drawing down savings to pay for schools, roads, and public safety. Alaskans deserve a complete fiscal plan that puts an end to the economic uncertainty we have been facing. It is for those reasons that I am calling the legislature into special session, and urge everyone to work toward compromise to fix the crisis now.”

Walker has promoted a path to budgetary balance that involves instituting new taxes, leveraging Alaska’s massive Permanent Fund investment pool, and reforming oil and gas tax credits as a broad approach called the New Sustainable Alaska plan. The elements of Walker’s preferred approach are included as agenda items in his special session proclamation.

While Seymour said he was hesitant to begin drawing deadlines about when Alaska had to solve its budget problems to prevent further downgrades and a resulting spike in borrowing costs, he was firm in his analysis that the state needs to keep at least some of its reserves intact.

“They can’t burn through all their reserves for operating purposes because they need those reserves to make their restructuring work,” he said.

Some of the legislation key to fiscal reform has already moved forward in the special session, though the Memorial Day holiday is putting a brief pause on some of the progress. The House leadership released a statement May 23 urging the Senate to take up what legislation is not yet in conference committees to resolve differences between House and Senate versions.

“We are urging the State Senate to quickly appoint their conference committee for the oil and gas tax credit reform measure, which is a key component in our overall fiscal plan,” said House Speaker Bryce Edgmon, D-Dillingham. “So far, the Senate has shown no willingness to take up a new revenue measure as called for by the Governor. Our fiscal plan, being comprehensive, has different components that interact to bring fairness and balance. We need the Senate to act on a new revenue measure soon so we have the full set of options before us as a basis to make progress on negotiations.”

In addition to its operating budget struggles, analysts also see a long-term challenge with the state’s public pensions.

“The state's adjusted net pension liability (ANPL), under our methodology for adjusting reported pension data, is $14.3 billion, or 85% of all governmental fund revenues based on fiscal 2014 data, the 15th highest ANPL-to-revenue ratio,” Moody’s said in its most recent rating report. “The ANPL also amounts to 25% of the state's 2014 GDP, the second highest.”

Joseph Krist, a partner at Court Street Group Analytics and a longtime analyst, said that he doesn’t view Alaska as being fated to repeat the story of Illinois, where an impasse on budget decisions combined with years of pension underfunding to create a massive backlog of unpaid obligations and serious financial crisis.

“They don't have good funding levels but they have instituted reforms to address the problem,” Krist said of Alaska’s pension and other post-employment liabilities. “They include putting new employees on a defined contribution system and they have injected some $3 billion into the system to improve funding. In my view this is more of an issue with moving the budget to a firmer footing in the face of low oil prices rather than an Illinois type situation where the underfunding has been a clear political choice. They also have done a better job of funding their OPEB liabilities than many other states. They have quite a way to go to become the Illinois of the tundra.”

Alaska lawmakers will need to work with some speed to get bills to Walker’s desk in time to become law, as special sessions are limited to 30 days.

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