Senate leaders are trying to convince members of the House and their own caucus to adopt a deficit reduction plan that restructures the Permanent Fund without adding taxes.
The Senate Finance Committee introduced SB 70 on Friday.
To start, the bill would draw 5.25 percent of the average market value (POMV) of the Permanent Fund over five years to fund government services.
“It is something that I feel, and the Senate majority feels, is crucial to any fiscal plan that comes forward out of the legislature,” Senate Finance Co-chair Lyman Hoffman (D-Bethel) said during a hearing Monday.
Laura Cramer, aide to Senate Finance Co-chair Anna MacKinnon (R-Eagle River), said the 5.25 percent POMV draw, which is reduced to five percent after three years, was a “policy call.”
“We’ve been in deficit spending for many years now, drawing from our reserves for the past six,” Cramer told Senate Finance members. “We’re needing additional funds on the front end to help us through these difficult times.”
According to a model from the Legislative Finance Division, SB 70 will generate $1.8 million for government services in its first year, reducing the deficit from about $2.7 billion to $900 million.
Rob Carpenter, a fiscal analyst with Legislative Finance, said the bill effectively balances the budget in Fiscal Year 2026 if spending only increases with inflation.
“It provides for a reasonable amount of funding at a conservative level,” Senate Majority Leader Peter Micciche (R-Soldotna) said during a press conference. “For today, and for the next time horizon of two- to three years, we know that this POMV is adequate for the percentage [of the deficit] that we’re wanting it to cover.”
The bill also holds the Permanent Fund dividend (PFD) to about $1,000 — an amount Hoffman described as fair — for the foreseeable future.
Micciche said that PFDs of $2,000 are a recent phenomenon. The $1,000 PFD in SB 70 is a more typical amount.
“When we look at the average over 35 years,” he said, “we realize that we’re actually delivering the same amount to those underprivileged folks that counted on that dividend as they have in the past. What’s more important: that they have billions in services available; or that they get a higher dividend today? My argument is that we are looking out for them and ensuring that they have adequate services available that they count on every day.”
MacKinnon said restructuring the Permanent Fund is the one thing that gets the legislature the closest to closing the deficit.
“The Senate is focused on the only thing that we believe can actually help Alaska and stabilize Alaska. We’re in a recession. We have the highest unemployment rate in the nation, two percent above the national average,” MacKinnon emphasized. “The Senate’s perspective is you have to do what impacts us the most first.”
Senate Majority Urges Against an Income Tax
Like the Senate majority, the House majority has a deficit reduction plan that relies on the Permanent Fund. However, its POMV draw is smaller, PFDs are projected to be larger, and it relies on an income tax.
Senate leaders reiterated Monday that taxes are not part of their short-term plans, whereas a restructuring of the Permanent Fund must pass this session.
“We’re hoping to get this 90-percent solution across the finish line without politically complicating it with the other issues,” Micciche said. “We know that when you add the other things in, such as extreme cuts or broad-based taxes from the House, that you begin to politically complicate the one solution that must pass this year, and that is a restructuring bill.”
The Senate passed a similar POMV bill last year before It was killed in the House Finance Committee.
“We passed the bill. We believed in the bill last year,” said Micciche.
MacKinnon expects a similar result this year if an income tax or oil tax credits are a part of the end-of-session negotiation.
“The problem is… as people try to hold out for what they think has to be part of the whole package, everybody loses,” she said.
While the House majority believes a progressive income tax balances the regressive nature of a PFD cut, MacKinnon provided a different perspective: “Those that are lower income in our state are predominantly receiving more services than the rest of the state is benefiting from. Those that are currently paying federal tax and have a job, are earning employment, and providing for their families are helping through their federal taxes to provide services all throughout the state of Alaska.”
The latter don’t benefit as much from the services for which they pay, MacKinnon argued.
Micciche said SB 70, combined with $750 million in cuts over the next three years, obviates the need for an income tax.
“If you look ten or 12 years down the road, with the growth of the [Permanent] Fund, eventually the Fund will provide a sustainable level of revenue, even in times of shortfalls with oil prices, that will keep us from having to ever need a broad-based tax in this state,” he said.
However, Micciche admitted that if oil prices drop below $40 again for an extended period, the legislature will need to discuss an income tax or sales tax.
“That’s just reality,” he said.
If the legislature passed an income tax this year and restructured the Permanent Fund, Carpenter told Senate Finance, “There would be surpluses quicker.”
Carpenter estimated an income tax would balance the budget in FY 2023.
Senate Leaders Try to Convince Anti-Restructuring Faction
Instead of an income tax, SB 70 includes both a spending limit and a revenue limit.
“There’s comfort in having both,” said MacKinnon. “They work together. They dovetail together.”
The spending provision caps unrestricted general fund (UGF) spending at $4.1 billion, with future increases tied to the Anchorage Consumer Price Index (CPI). That would hold spending at current levels, since capital spending and debt payments are exempted.
“You have a more conservative growth rate in your appropriation limit using the Anchorage CPI than if you had used an index of all Alaska, which I’m not sure exists,” said Carpenter.
“We’re ensuring the public that we don’t intend to make available, when the price of oil turns around, a lot of extra revenue that’s going to get us back in the position where we started,” Micciche told reporters.
The revenue limit in SB 70 reduces the POMV draw on a dollar-for-dollar basis when oil revenue exceeds $1.2 billion.
“If there was an income tax passed, which many of us hope doesn’t occur… does anything in this bill prevent us from spending that income tax money?” Sen. Mike Dunleavy (R-Wasilla) asked.
Cramer responded that the income tax revenue would not be addressed by the revenue limit in the bill. And because the appropriation limit would be statutory, Carpenter said a simple majority of each house could vote to spend beyond the limit.
“I think we absolutely have to be mindful of additional revenues in the future as they come into play,” said Micciche, suggesting he would be open to an amendment.
Dunleavy also asked what would prevent the legislature from dodging the spending limit by moving items into the capital budget.
“It’s our responsibility,” MacKinnon responded. “It’s the legislature itself that has to hold itself accountable to make sure that capital items are in the capital budget and operating items — reoccurring expenses — are in the operating budget.”
Dunleavy is the only returning member of the Senate majority to vote against the POMV last year.
As the current Chair of Senate State Affairs, he held a hearing last week on his own 50/50 Plan that would pay PFDs under the existing formula and spend other Permanent Fund earnings on services without restructuring the Fund.
SB 70 was referred directly to Senate Finance, bypassing Dunleavy’s committee.
When Dunleavy asked MacKinnon Monday when she plans to move SB 70, she replied sharply that she is waiting on the remaining POMV bills. She added that she wants to move SB 70 as quickly as possible.
“The people of Alaska are counting on us,” she said. “National credit rating agencies are watching us and talking about Alaska, not only in our credit reports, but in credit reports across the United States.”
MacKinnon reminded SB 70 skeptics that “This bill is subject to change by each member of the body that it is residing in.”
Permanent Fund Restructuring Delays Other Senate Finance Priorities
As seems to be the case again, Micciche said that Senate leaders worked hard last year to convince caucus members to compromise on a POMV.
Micciche and MacKinnon said Monday they want to get the Permanent Fund out of the way so they can move on to structural changes, like reforming a variety of tax credits unrelated to oil and addressing the $6 billion public employee pension liability.
“While it may look like we’re solving a huge portion of our problem — and I believe that we are,” MacKinnon said of SB 70, “structurally we are in imbalance.”
She noted that Alaska pensions assume an eight-percent investment return, while return assumptions are being reduced nationally.
In lengthy remarks seemingly directed at Dunleavy, MacKinnon laid out a case before Senate Finance for compromise on SB 70 so the legislature can move on:
As we go forward, it is a collaborative process that requires all of us to come together for the best interests of all Alaskans, not an individual district, not one individual voice; but that that one individual voice can make an incredible difference. But you have to convince your colleagues. You have to convince regions of the state through the election process, through your representation at this table and in the halls of the Capitol, how we should move forward and face both a $3 billion deficit and how we will solve a pension liability that is hanging over our head in excess of $6 billion.
So we have a huge challenge in front of us. I have optimism that the people at this table will bring the people’s views to the table, both those that don’t want to touch the Permanent Fund dividend, those that believe an income tax should be in place, those that think the status quo is fine and that we can just draw from our Earnings Reserve Account, and those that think a more structural change statutorily needs to be in place to protect the people of Alaska and pull us from a continued nosedive in the recession that we’re currently in.
Micciche said that the goal is to finish the budget and pass SB 70 before the end of the session so work can begin on other issues for 2018 that can carry into the interim.
One issue consistently raised by Senate Finance Vice-chair Click Bishop (R-Fairbanks) is deferred maintenance.
“This legislature, working with the administration, has to get on a schedule,” Bishop said of deferred maintenance. “If we don’t, we’re never going to get out of these peaks and valleys with UGF funds.”
The Legislative Finance model for SB 70 assumes a capital budget that remains at $180 million for nine years, which would not address the maintenance backlog. Unlike the pension liability, the maintenance backlog doesn’t appear on Senate Finance spreadsheets.
“That is a debt burden that we have added and that we will continue to add until we have a comprehensive plan on dealing with deferred maintenance,” agreed Micciche. “On the emergency management mode that we’ve been in the last three years, it just simply hasn’t been an option.”
Micciche said that SB 70 will stabilize State finances, encourage investment, and allow the State’s savings accounts to invest more aggressively as they grow.
Senate Finance holds its next hearing on the bill Wednesday, when the committee will hear from the Walker Administration and the Alaska Permanent Fund Corporation.