Home Business & Education Economics Differences of Opinion Threaten Movement of Deficit Reduction Proposals in Senate

Differences of Opinion Threaten Movement of Deficit Reduction Proposals in Senate

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Original photo by Duca di Spinaci, Creative Commons Licensing.

The Senate majority caucus says it is “synced up” on the need to restructure the Permanent Fund. Yet a Senate Finance Committee hearing Monday revealed strong disagreement over what will or will not protect the Fund.

Senate Finance is considering three different bills that will utilize a portion of the Permanent Fund earnings reserve, calculated using the Fund’s average value over five years. This percent-of-market-value (POMV) draw is designed so it doesn’t outpace the Fund’s investment returns, allowing the Fund to grow.

“A POMV is tried and true,” Sen. Natasha von Imhof (R-Anchorage) said at a press conference Monday. “Percent-of-market-value is the mechanism and method that foundations and endowments across the world utilize. It has been tested over time, and it works.”

Senate Finance and Gov. Bill Walker (I-Alaska) have similar bills that rely on a 5.25 POMV draw and fixed $1,000 Permanent Fund dividends (PFDs) for the first couple years.

SB 70, sponsored by Senate Finance, adds a $4.1 billion cap on operational spending.

The bills would leave the State with a $900 million deficit in Fiscal Year 2018. The Senate majority has proposed to close that gap with $750 million in cuts over three years.

“At this point, our focus is on the few things that matter most to Alaskans this year, and that is budget, spending cap, POMV,” said Senate President Pete Kelly (R-Fairbanks). “There’s going to be some slight philosophical disagreements between members of this body, but in general, the Senate is pretty well synced up.”

However, at 4.5 percent, Sen. Bert Stedman’s (R-Sitka) SB 21 proposes a smaller POMV draw than the Senate majority’s bill. Half of the resulting $2.2 billion would go to $1,700 PFDs, and the other half would pay for government services.

“The dividend outflow should be, in my opinion, tied to the size of the Fund,” Stedman said during a Senate Finance hearing.

SB 21 would leave a deficit of $1.6 billion.

“The focus is not — and I repeat, is not — to solve the fiscal gap,” Stedman testified. “It’s not the holy grail of fiscal solutions that after being adopted all our ills go away.”

Stedman described his bill as an agreement with Alaskans to climb out of a fiscal hole.

“You’ve got to get through the short run alive to live in the long run,” he said, referring to the State’s fiscal situation. But, he added, “What we can’t lose sight of is the Permanent Fund should not be subordinate to our budget deficit.”

“In my opinion, the Permanent Fund needs to come before short-term interest in solving our fiscal problem,” Stedman emphasized. “It is not right for us to consume this wealth bubble over the next decade or so or less. We owe it to future Alaskans to move this forward in its entirety as much as absolutely possible.”

Sen. von Imhof: Senate Finance in Process of “Making the Sausage”

“All of the plans absolutely ensure the health of the corpus of the Permanent Fund,” Senate Majority Leader Peter Micciche (R-Soldotna) said, referring to the constitutionally-protected part of the Fund.

But Micciche worried about leaving such a large deficit if SB 21 passes.

“Senate Bill 70 allows response time if there’s a fairly dramatic increase or decrease in the price of oil,” he said.

In contrast, “We’re always on the edge with Senate Bill 21,” Micciche said. “We’re never going to have a structural comprehensive solution… It quickly puts us back into a situation where we either have to look at fairly dramatic cuts or revenue.”

“I am adamantly opposed to taking out billions of the Permanent Fund because we can’t make hard decisions collectively,” Stedman responded. “Collectively, all 60 of us are very dangerous.”

Senate Finance is holding hearings all week on the POMV bills. The committee took public testimony Monday afternoon.

“During the week, we’ll be making the sausage, and on Friday, something will come out,” von Imhof told reporters.

Sen. Mike Dunleavy (R-Wasilla) held SB 21 and Walker’s SB 26 in the Senate State Affairs Committee longer than Senate leadership wanted. He tried to amend SB 21 to require a citizen advisory vote, while he voted against moving SB 26 from committee at all.

Monday, Dunleavy suggested he will introduce his own Permanent Fund bill, unlikely to involve recalculating the PFD.

“I think what will come out of these discussions in Finance, hopefully, is something that will be good for the people of Alaska and good for the State,” he said.

“The fact is there are differences between these bills, and we need to make sure all their differences and benefits get examined,” added Kelly.

Deficit Left By SB 21 Would Mean Deep Cuts, Taxes, or Unplanned Draws

In a presentation to Senate Finance, Commissioner of Revenue Randall Hoffbeck said that a POMV is necessary to address the “resource curse” of high commodity volatility and slow economic growth.

“Obviously, we can’t take all the volatility out of oil price. We can’t take all the volatility out of incomes from our investments, but we can structure them in such a fashion that, by using them both together, we can take a substantial amount of volatility out of the budgeting process for State expenditures,” he said.

If the rest of the deficit were closed, SB 26 would grow the Permanent Fund to $61 billion in real dollars by FY 2041. But, as Hoffbeck acknowledged last week, Senate Finance’s SB 70 would grow the Fund to $66 billion under similar circumstances.

In addition, because SB 26 includes oil royalties in the calculation of the PFD, the real value of the PFD would decrease to $861 by FY 2041.

“The dividend’s real buying power would be reduced over time,” Hoffbeck admitted. “The dividend would actually grow faster under SB 70 than under SB 26.”

Though SB 26 would grow the Permanent Fund at a slower rate, Hoffbeck echoed Micciche, saying the bills under consideration all grow the Permanent Fund on paper.

“All three of them, the Fund would grow — assuming a full fiscal plan — would grow at a rate that would more than offset inflation,” he said.

But, Hoffbeck said of Stedman’s bill, “To close a $1.5 billion deficit, we would need all of the cuts that were proposed by the Senate… plus all of the revenues being proposed by the House.”

The House majority has proposed a 4.75 POMV draw with an income tax estimated to bring in $643 million in its first full year.

“I am worried that the POMV bill that is being presented there is undisciplined,” von Imhof said because the House does not include a revenue limit or spending cap.

SB 26 and SB 70 both limit the POMV draw on a dollar-for-dollar basis when oil revenue exceeds $1.2 billion. That limit is triggered when oil hits $72 per barrel. When oil exceeds about $100 per barrel, no money would be drawn from the Permanent Fund Earnings Reserve Account (ERA).

“At this point, it’s my opinion that the only thing standing between Alaska and an income tax is the Senate,” Kelly told reporters. “There’s a foundational absurdity in the fact that, under an income tax, what you contemplate is handing a person a check with one hand and taxing them with the other. That just doesn’t make sense.”

Though the Institute of Social and Economic Research (ISER) has shown budget cuts cost more jobs than a progressive income tax, Kelly insisted, “You don’t increase taxes in a recession. It will just make it more acute.”

“My feeling is an income tax is a short-term solution with a very long-term negative consequence,” von Imhof said.

“I think there’s going to be some serious consequences if we go down the tax road,” agreed Dunleavy. “Now that we’re on the verge of taking money out of your pocket — literally out of your pocket — we really have to ask ourselves, ‘Do we have a tax base that is sustainable?… Is our tax base going to disappear and move south?’”

Kelly pointed out that an income tax will necessitate about 60 new State jobs, according to a fiscal note from the Tax Division.

“We don’t want to be growing government so that we can tax the producers of Alaska,” he said. “Currently, enough people in this state believe, like we do, we’re spending too much.”

“The last thing I think we want to do is give politicians more money to spend,” Dunleavy added.

If the legislature were to pass SB 21 without filling the rest of the deficit with taxes or cuts, it would need to turn to other savings or unplanned draws from the earnings reserve.

“The greatest threat to long-term Fund durability is unplanned withdrawals,” Hoffbeck warned Senate Finance. “In order to maintain the durability of the Fund, we need to create a situation where there’s less chance for unplanned, unstructured draws. In order to do that, we need to put as much money as possible in the structured portion in order to close the fiscal gap to the greatest extent possible.”

A Legislative Finance Division model showed that SB 21 would drain the Constitutional Budget Reserve (CBR) savings account in FY 2021, just two years later than doing nothing. At that point, the State would have to begin unplanned draws from the ERA.

“If we deplete the Earnings Reserve Account, that is where currently Alaskans receive their dividend calculation from. Should that account reach zero, that is what we’re talking about when we say that a dividend is at risk,” Senate Finance Co-chair Anna MacKinnon (R-Eagle River) explained for the public.

Sen. Stedman: Larger POMV Bills Mean “Wolf is Right Outside Our Door”

During his own presentation, Stedman compared the legislature to the wolf in “Little Red Riding Hood,” hungrily eyeing the PFD.

“How do we protect that asset?” he asked. “We’re the ones that have the power of appropriations. We’re the ones that will either destroy it, hinder it, protect it, build it.”

“As long as the earnings reserve is wide open to a [simple majority] vote, it’s open to be liquidated in chunks,” Stedman warned.

The House Finance Committee approved a budget amendment that includes a $4.2 billion POMV draw covering two years and closing the FY 2018 deficit.

“The move that the House did, by potentially shifting billions of dollars out of the ERA, should be concerning to all of us,” Dunleavy told reporters.

House Finance will consider budget amendments beginning Tuesday.

Stedman warned that the House proposal and bills removing similar amounts from the Fund are unsustainable.

“This isn’t the wolf is around the corner; the bloody wolf is right outside our door,” he told Senate Finance members. “You take out $1 billion more than you need from the Permanent Fund, it’s not a one-time deal; it’s a permanent retardation of future returns.”

Stedman noted that not paying a PFD would solve the State’s fiscal problem.

“Taking 100 percent fixes the deficit problem. It creates a political problem, on the other hand, in that we’re going to have social unrest,” he said.

Conversely, paying out massive PFDs means the State can’t make payroll.

So Stedman has proposed splitting the payout to honor the collective ownership of subsurface resources.

Sitka also has a Permanent Fund with a 6-percent POMV payout, an amount Stedman said was set too high because of losses in the Southeast timber industry.

“That is absolutely the wrong direction to go, to set your payout given your own fiscal deficit issues beyond what’s bearable to the portfolio,” he said. “It’s not fair for one generation to consume it, leaving the other generation with nothing or next to nothing. But we also had the need to make payroll at city hall.”

Stedman said his goal is to show the public a POMV works before enshrining it in the Alaska Constitution, forcing the legislature to close the rest of the deficit.

“It doesn’t quite get us out of this mess,” Stedman said of SB 21. “We need additional help.”

He suggested the legislature could increase the POMV draw to 4.75 percent and lower the PFD to $1,200 for a few years to close a bit more of the deficit. Such changes extend the life of savings, a model showed.

“All the changes we just made move the bill closer to Senate Bill 70 and Senate Bill 26,” Micciche reacted.

Stedman told Micciche that he “couldn’t disagree more” that those bills protect the Permanent Fund. SB 26 and SB 70 both draw $5 billion, or about nine percent of the Fund, he stated.

“My concern is the easiest vote that we’ll take of all the options collectively will be to loot the Permanent Fund. And when you take out nine percent of the Permanent Fund in one year, you’ve got a problem,” said Stedman.

Stedman’s statement comes from a misreading of SB 70.

While Walker has suggested draws totaling $5 billion for FY 2017 and FY 2018 in his proposed budget, SB 70’s effective date would not allow for a FY 2017 draw, limiting the first draw to $2.5 billion.

“We absolutely find it unacceptable to risk the corpus of the Permanent Fund and will not do that,” Micciche told Stedman. “You are maybe more conservative in your analysis, but the experts we’ve had at this table agree that 5.25 percent… is something that’s extremely unlikely to find a failure rate over time.”

Senate Finance continues work toward a compromise with hearings on the POMV bills Wednesday.

Craig Tuten moved from Florida to Alaska with his wife Rachael in 2006. He studied history at Florida State University while everybody else was having a good time. It is hard to list a low-wage job he hasn't briefly held.

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