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Early Talk About the State’s Fiscal Options Previews Coming Battle Between House, Senate Majorities

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On Monday, the House Finance Committee considered a variety of options for addressing the deficit, but members of Senate leadership warned that a comprehensive solution could bog the legislature down and result in another year of special legislative sessions.

Last week, the committee heard Gov. Bill Walker’s plan to use 5.25 percent of the Permanent Fund’s average market value over five years to fill a portion of the deficit and pay a $1,000 Permanent Fund dividend (PFD).

But, there are other fiscal plans drafted by legislators. A comprehensive plan from the House majority is said to be forthcoming.

House Finance Co-chair Paul Seaton (R-Homer), whose office will likely be the source of that bill, concluded that the best way to come to a consensus on a fiscal plan is to establish a framework under which to consider different options.

In presenting that framework, Legislative Finance Director David Teal advised House Finance members “to focus on the basics and not get bogged down in those optional add-ons to a plan.”

“I think you know how bad the situation is, but you also know that you have tools to address it,” he continued. “Those tools are cuts, taxes, use of investment earnings of the Permanent Fund, or using reserves.”

Teal noted that State savings are declining rapidly, while cuts and taxes won’t fill the $3 billion deficit. The Permanent Fund investment earnings are the single largest tool available for deficit reduction.

“Using earnings would have less economic impact than either cuts or taxes. That’s because cuts or taxes remove money from the economy. Those earnings are not currently in the economy, so using earnings doesn’t take anything away from the existing economic structure,” Teal explained in Monday’s hearing.

If legislators choose to go with a percent-of-market-value (POMV) plan like Walker’s, they will need to decide what percentage to use. Every quarter-percent increase means an additional $125 million available for immediate spending. A larger draw reduces the size of the Permanent Fund and thus future payouts.

However, Teal advised committee members, “Just pick something. Anywhere between 5.25 [percent] and 4.25 works… It won’t make or break a plan.”

“Anything above 4.75 [percent] extends life of reserves,” he later elaborated. “When you start getting lower than that, it’s perhaps not quite as much as government needs to maintain its current level of expenditures.”

The legislature could even set a higher POMV payout for immediate needs, then scale it back for future years.

Teal recommended against a plan like Sen. Mike Dunleavy’s (R-Wasilla) “50/50” plan that uses half of a draw from Permanent Fund earnings to pay PFDs and the other half to pay for government. Rather than using the average value of the entire Permanent Fund, such a plan would be calculated based on volatile investment earnings alone.

“Government functions a lot better with stability,” Teal said.

Director Teal: PFDs Compete With Other Expenditures

Walker’s POMV bill would generate $2.5 billion from the Permanent Fund earnings reserve. He proposes to use $700 million of that to pay a $1,000 PFD.

That would leave a deficit of over $800 million, assuming the legislature does nothing about deferred maintenance in schools, underfunding of student transportation, and Walker’s use of the Higher Education Investment Fund for retirement payments.

If legislators chose to pay a $2,200 PFD — roughly the amount it would be under the statutory calculation — the deficit would grow to $1.6 billion after the POMV payout.

“In deciding how much should go to dividends, it’s not just a political choice,” Teal said. “Higher dividends translate directly into the need for some combination of additional revenue, additional budget reductions, or larger draws from reserves.”

Previously, payment of PFDs has been “off the books” because it was the only use of the Permanent Fund earnings reserve. Walker’s proposal confirms the earnings reserve is indeed available for spending, and that spending could go to things other than the PFD.

Teal said legislators will need to decide how much money should go directly to Alaskans through the PFD and how much should go to government services for Alaskans.

“You need to answer that question before you can get a bill out of here,” he told House Finance.

“At the end of the day, everything’s competing to fill the budget gap,” Rep. Tammie Wilson (R-North Pole) acknowledged. “The question then has to be, are we going to have residents through the Permanent Fund earnings- which affects their dividends- be the ones who fill the gap solely, or do we look Outside to whether it’s tourism coming in, whether it’s Outside workers coming in?”

Senate Majority Hints Taxes Will Delay End of Session

Wilson was alluding to the possibility of a sales tax or income tax. But Teal repeated it will take a variety of actions to close the deficit.

“I don’t believe you can cut $2.7 billion. I don’t believe you can tax $2.7 [billion]. I don’t believe you can get $2.7 billion from the earnings reserve. None of these things on their own will solve the fiscal problem,” he told House Finance members. “Some combination of them can fill the deficit. That’s what you’re here to debate is how much needs to be done.”

The Senate majority has made restructuring the Permanent Fund one of its goals for the session, along with cutting the budget and revising an ineffectual spending limit.

Yet they made it clear during a press conference Monday that they plan to fill the deficit with savings again this year, rather than consider new taxes.

“There will be a sizable draw [from savings],” Senate President Pete Kelly (R-Fairbanks) said. “There’s really almost no way around that in this particular session, but if we leave here, we should have in place- if we’ll follow the Senate’s plan- we should have in place a budgetary regime that takes us well into the future and actually fixes our fiscal problem.”

“With a restructuring and some reductions, we know that we have a very manageable gap, and we have savings that moves 15 years out versus one [year],” clarified Senate Majority Leader Peter Micciche (R-Soldotna).

Commissioner of Revenue Randall Hoffbeck told House Finance last week that simply passing the POMV bill without taxes will lead to a reduction in value of the Permanent Fund over the next 25 years as savings empty and legislators are forced to pull from the earnings reserve to fill the remaining deficits.

Micciche said filling the remaining gap should wait another year or it is unlikely the legislature will finish within the 90 day limit.

“If we do the necessary things we need to do and we walk out of here with an $800 million gap, then we have something to come back and talk about next year. If we complicate the solutions of a restructuring and a reasonable budget this year with all of those other philosophical, rhetorical things, that’s when it gets really complicated, and that’s what drags on through the year,” he said. “If we complicate it and drag on through the summer, I think we all lose.”

Waiting another year will almost certainly further jeopardize the State’s credit rating.

Director Teal Recommends Against Mixing POMV and Spending Limit

While the Senate majority supports a spending limit, Walker removed one that was inserted last year in his POMV bill.

Instead, the bill has a revenue limit that reduces the POMV draw dollar-for-dollar when petroleum revenue exceeds $1.2 billion. The Walker Administration’s goal is to keep government spending down when oil prices are high.

Teal said a tight spending limit, by contrast, would have practical issues.

For example, the State paid the minimum in oil tax credits last year, and Walker proposes to do so again in Fiscal Year 2018, to the consternation of the Senate majority.

“If you ever want to pay more than the minimum tax credits and you have a tight limit, you’ll be bumping that limit,” Teal noted.

Big capital projects like the Alaska Liquified Natural Gasline (AKLNG) would also be impacted, Teal said.

“A spending limit is really designed to cut off the windfall revenue,” he explained.

Windfall revenue was on Kelly’s mind Monday when he said, “If politicians have money, they’re going to spend it.”

Kelly said the legislature moved to control spending last year with Medicaid reform. But, he said, “I don’t know that people follow things that closely, and what they want to know is that we just have a general spending control year after year.”

“A spending limit is something I think most people could say, ‘That’s a reasonable thing to put in place,’ and a restructuring of the Permanent Fund that protects the dividend. Those are pretty reasonable asks,” he concluded.

Kelly said the legislature would first try to pass a statutory spending limit before adding it to the Alaska Constitution, but Teal noted that no legislature can limit the appropriating power of another.

“Arguably, a spending limit must be constitutional in order to be fully effective,” Teal said.

“Talk about them all you want,” Teal said of spending limits, “but you might want to put them in a different bill because it’s a very complex topic that you may want to avoid in deciding what kind of POMV provisions you want.”

Teal similarly warned against inclusion of an income tax in a POMV bill.

There are at least four separate bills or proposed constitutional amendments introduced by the legislature that would limit spending

Walker’s POMV bill will receive its first Senate hearing Tuesday afternoon in the Senate State Affairs Committee.