The Senate majority introduced Friday its own deficit reduction plan that relies on budget cuts and a spending limit, rather than the House’s plan to institute an income tax.
SB 70 would draw 5.25 percent of the average value of the Permanent Fund over five years, roughly $2.5 billion. That percent-of-market-value (POMV) draw would be reduced to five percent after three years.
“We believe the public trusts us to use the Permanent Fund responsibly,” Senate Majority Leader Peter Micciche (R-Soldotna) said in a press conference.
Angela Rodell, Executive Director of the Alaska Permanent Fund Corporation, told House Finance Thursday that a POMV of between 4.75- and 5.25 percent will not impact how the Fund is invested and will actually provide stability since the Fund will not have to increase liquidity for an unplanned draw.
The bill also includes a spending limit of $4.1 billion, growing with the Consumer Price Index (CPI).
Senate President Pete Kelly (R-Fairbanks) said the bill aligns with the Senate majority’s three goals of spending cuts, a spending limit, and a restructuring of the Permanent Fund.
“The solution to the State’s fiscal problem — it’s not easy, but it is simple,” he told reporters. “We encourage you in the press to invest some time in understanding this thing. I think this is important for the people of Alaska and that you write about the plan, not about silly things that are going on in [the Capitol], which sometimes distract us. This is important, and the people of Alaska need to know it, and it’s kind of your job to communicate that to them.”
SB 70 would limit the Permanent Fund dividend (PFD) to $1,000 for the first three years. Then, when the POMV drops to five percent, the PFD would constitute 25 percent of that draw.
According to a Legislative Finance Division model, the PFD would dip slightly below $1,000 in 2021, then remain around $1,000 for the next five years.
“We’re going to continue to pay a dividend,” Kelly assured the public. “We’re going to stabilize that dividend so that it survives. Under the current calculation, it’s a little bit in peril.”
The Senate’s plan is a hybrid of Gov. Bill Walker’s Permanent Fund Protection Act (PFPA), a 5.25-percent POMV draw with a PFD based on a portion of the draw and oil royalties.
Last year, before PFPA was molded into its current form by Senate Finance, Sen. Lyman Hoffman (D-Bethel) said Walker was “not being forthright” about protecting the Permanent Fund because his plan cut the PFD to $1,000, though it would grow the real value of the Fund.
Hoffman seemed to have changed positions Friday.
“I believe by doing [this], we are protecting the dividend,” he said of SB 70.
Caucuses Disagree Over Spending Limit, Income Tax
At $1,100, the House majority’s proposed PFD is larger than SB 70.
The House majority’s deficit reduction plan, HB 115, was introduced with a less aggressive 4.75-percent POMV draw, or roughly $2.25 billion. PFDs would receive 33 percent of that amount.
On Friday, House Finance Co-chairs Paul Seaton (R-Homer) and Neal Foster (D-Nome) introduced a series of amendments to HB 115 that would start the POMV at five percent, then reduce it to 4.75 percent in FY 2020.
Though House Finance did not take any action on the amendments, they indicate the direction Seaton and Foster wish to steer members.
The committee is currently focused on budget subcommittee closeouts before beginning public testimony on the budget Thursday.
“We certainly hope that the House agrees with our approach,” Micciche said during the SB 70 press conference.
Clearly, the House and Senate are nearly matched on the POMV, but the spending limit is another matter.
The current limit established in Article IX section 16 of the Alaska Constitution is tied to both the CPI and population. It is universally considered to be ineffective.
SB 70 eliminates population change from the spending limit calculation.
In a presentation to House Finance, Legislative Finance Director David Teal showed that the existing spending limit modified to include half of population change and half of the CPI would have impacted the budget every year from FY 2007 through FY 2016.
Teal told committee members that, in addition to limiting budgetary flexibility, a spending limit has constitutional concerns because no legislature can limit the appropriating power of another.
“My opinion is that future legislatures need to be able to respond to the elements of the time,” Seaton said similarly. “Requiring a future legislature to violate a law that we put in to be able to respond effectively to the conditions of the time doesn’t seem to me to be the way to go.”
Kelly said Friday the statutory spending limit in SB 70 would be a placeholder until the legislature approves a proposed constitutional amendment next year.
Perhaps because the Senate plan allocates more of the POMV draw for government spending than the House plan, Micciche said the spending limit is designed to provide the public assurance.
“We’re not looking for more money for government; we’re simply looking to fill the fiscal gap and make sure that spending is controlled,” he said.
Instead of a spending limit, the House’s plan has an income tax equal to 15 percent of a taxpayer’s federal income tax liability. It is estimated to bring in $643 million in its first year.
“At this time, we are not envisioning any taxes,” Kelly said Friday, referencing the House plan. “We want to protect the economy. We’re in a recession. There’s no question about that. We don’t want to start pulling money out of the private sector through taxes to pay for government right now. We think that would be counterproductive.”
Senate Plan Requires Further Budget Cuts
Last year, the Institute of Social and Economic Research (ISER) at the University of Alaska Anchorage (UAA) concluded that every $100 million raised in income taxes will cost the state about 775 private sector jobs.
For every $100 million cut from the budget, it costs about 1,250 jobs, 750 of which are private.
Nevertheless, the Senate majority’s plan relies on budget cuts, rather than taxes.
“Many people throughout Alaska say that we’ve cut enough, but until we have a long-term plan, we have to continue to look at budget reductions,” Hoffman said Friday.
“This is a math problem,” said Micciche. “It doesn’t take long with a calculator to know that if you took care of all the other issues and didn’t pass this bill, you have an 85-percent hole.”
In order for SB 70 to close the deficit by FY 2024, as Micciche says, the Senate plans to cut $750 million over the next three years, including $300 million this year.
Hoffman, who is in charge of the operating budget, said he is targeting the Departments of Education & Early Development, Health & Social Services, Transportation, and the University of Alaska for five percent cuts, an amount he called “reasonable.”
If SB 70 passes with the proposed cuts and without taxes, the State would have to draw over $600 million from savings next year, a result Micciche said would be a “raging success.”
“We’re going to use our reserves in this solution. We’re not going to taxes,” insisted Kelly.
But on Tuesday, House Finance Vice-chair Les Gara (D-Anchorage) said the Senate’s cuts “would put us in a ten-year recession, one that will kill 10,000 to 15,000 private and public sector jobs that we will not get back for ten years.”
“If you’re just going to cut $1 billion and sort of play the soundbite game, you’re going to cause a ten-year recession. Just admit that to your constituents,” Gara said..
In contrast, Micciche asserted that restructuring the Permanent Fund, cutting the budget, and capping spending will pull the state out of a recession.
Despite his push for cuts, Hoffman told reporters, “Five to ten years from now, when people look back at what the first session of the 30th Alaska Legislature did, they’re not going to talk about the $300 million reduction; they’re going to talk about what the legislature did to resolve the long-term solution for the state of Alaska.”
“If things remain relatively stable like they are today, this is the solution,” Micciche said of SB 70. “It protects our economy. It tells the world that Alaska has dealt with our fiscal gap, and it opens Alaska back up to investment to pull us out of this recession earlier.”
SB 70 is scheduled for its first hearing Monday in the Senate Finance Committee.
The Senate minority tried to add a Senate State Affairs referral, but the Senate voted along caucus lines to uphold Kelly’s sole Senate Finance referral.
Senate State Affairs Chair Mike Dunleavy (R-Wasilla) has held Walker’s PFPA in committee, along with another Permanent Fund bill from Sen. Bert Stedman (R-Sitka).
Dunleavy voted to send SB 70 straight to Senate Finance.