Stateline Story

In Alaska, High Oil Prices Spark an Unusual Budget Fight

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Alaska lawmakers, like their counterparts in other state capitals, have spent a lot of time this year bickering over the budget. Competing proposals have so polarized the Legislature that the governor, Sean Parnell, called lawmakers into a special session after the original 90 days proved insufficient. The special session itself has been a drawn-out affair, with one rank-and-file legislator spotted barbecuing in the Capitol parking lot as negotiations stood at a standstill.

But the budget standoff in Alaska differs in one key respect from those unfolding in most other states. While lawmakers elsewhere fight over how much to cut from the budget, legislators in Juneau are debating what to do with billions of extra dollars funneling into the state treasury because of soaring energy prices — a windfall for a state that is ranked 47 th in population and already has more than $11 billion in the bank.

It's a debate other states would love to have. But Alaska lawmakers are not smiling as one 30-day special session soon could spill over into another.

The unusual battle is being waged by two factions. Parnell is allied with the Republican-controlled House of Representatives. Then there is the Senate, which on paper is divided evenly between the political parties but as a practical matter is controlled by a " Bipartisan Working Group " of 10 Democrats and 6 Republicans.

The standoff began when Parnell proposed — and the House narrowly passed — a $2 billion-a-year plan to cut taxes on oil companies. Parnell said the plan would encourage more production and, ultimately, pad state revenues even further. But the proposal met a wall of resistance in the Senate, where lawmakers from both parties demanded more information before agreeing to a huge tax cut for oil companies that already receive a host of tax benefits from both the state and the federal government.

Now, the focus of the debate has shifted from the governor's rejected tax cuts to a list of costly energy infrastructure projects that state senators want to bring home to their constituents, saying the time to invest is now. The projects include transmission lines, pipelines, hydroelectric facilities and other initiatives that can cost much more money in Alaska than in other states, simply because of the enormous distances between population centers.

Whether those projects materialize, however, is an open question. Parnell is unhappy about the fate of his oil tax cuts, and members of the Senate bipartisan group are fearful that he will veto their projects in retaliation. Parnell, for his part, thinks the Senate wants to spend too much taxpayer money. Meanwhile, the standoff has raised both constitutional and political questions over who is really running Alaska government these days — the conservative governor or the more moderate Senate coalition.

For Parnell — who was elected convincingly last Novemberbut governsin the shadow of Sarah Palin, whom he served as lieutenant governor — the budget flap offers an opportunity to define himself at the beginning of his first full term in office. What started as a "legitimate, passionately felt policy difference" over oil taxes has become a much more personal and consequential disagreement, says Rebecca Braun, editor and publisher of the Alaska Budget Report , a Capitol publication. Parnell "just wants to win and (the Senate) to lose," she says. "I don't think they're looking for a win-win anymore."

Fears about the future

It is easy to characterize the Alaska standoff as purely a case of political brinksmanship in a state teeming with cash. But Braun and others note that the budget fight also is rooted in a reality that many Alaskans find unsettling: Oil production is declining.

Parnell's push for a major tax cut for oil companies, which dominated the regular session, was aimed at ramping up production, which has been steadily decreasing on Alaska's North Slope — home of the nation's largest oil field — for years. Alaska gets about 85 percent of its general fund revenues from oil taxes, so the health of the oil industry is of paramount concern for most policymakers. It is important for residents, too, since Alaskans receive a yearly divided check from the state treasury.

Parnell argued forcefully during the regular session that a major tax cut would encourage oil companies to boost production. The state Senate disagreed, shelving the governor's proposal and instead preferring to spend money on energy investments.

What both sides do agree on is that Alaska's $11 billion in reserves, the largest rainy day fund in the nation , is a deceivingly large number. The state relies so heavily on oil — and oil prices are so volatile — that many lawmakers worry deeply about the future of Alaska if production keeps declining and gasoline prices fall from their current prices. In 2008, the price of oil hit record highs only to come crashing down less than a year later.

Those worries have been on display not only in Juneau, but in Washington, D.C., where Democrats in the U.S. Senate this week debated legislation that would eliminate tens of billions of dollars in federal tax subsidies for oil and gas companies in the hopes of reducing prices at the pump.

Getting personal

If the Alaska budget standoff started as a substantive policy disagreement over oil taxes, it has since turned into gripping political theater, with the Senate and Parnell fighting not only over oil taxes and energy investments, but over protocol such as the appropriate length of the legislative session and the proper use of the governor's veto pen.

When lawmakers could not agree on a spending plan by the end of the regular session on April 17, Parnell laid the blame squarely at the feet of the Senate, saying the chamber was intentionally ignoring a 2006 voter initiative limiting legislative sessions to 90 days.

But the Senate argues that it was prevented from finishing its work in the regular session by the governor's relentless emphasis on tax cuts. Meanwhile, to protect its energy investments from a possible retaliatory veto, senators have included highly unusual budget language requiring the governor to either accept or veto the whole list of the energy projects they want. The maneuver, which the governor and his attorney general say is unconstitutional, is seen as a way of forcing Parnell's hand, since he is likely to want at least some of the energy projects under consideration.

The current special session is set to end on May 17, and it is anyone's guess whether Parnell or the state Senate will relent. Meanwhile, political analysts who are assessing the showdown see some carryover from Palin's rocky tenure, given that Palin and Parnell were part of the same administration just a few years ago.

Palin and the state Senate had a similarly icy relationship, particularly on the subject of gubernatorial vetoes, since the former governor rejected several spending projects that were important to the Senate. When Palin later received the Republican nod for vice president, Alaska state senators — including some from her own party — were among those who criticized her time as governor.

"It certainly did not help Sarah Palin to raise the ire of the state Senate," says Carl Shepro, a political science professor at the University of Alaska at Anchorage. Still, many expected the current governor to have an easier time with the Senate than Palin did, especially since Parnell, unlike Palin, served in that chamber himself.

"Everybody thought this was going to be a good relationship," Shepro says. "But apparently when you walk into the (governor's) office, things change."