Home Business & Education Economics Sen. Dunleavy Looks to Shake Up Deficit Reduction Plans

Sen. Dunleavy Looks to Shake Up Deficit Reduction Plans

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The Senate Finance Committee is preparing to roll out a revised version of a Permanent Fund restructuring bill. Before it does, Sen. Mike Dunleavy (R-Wasilla) is adding another idea to the mix.

Gov. Bill Walker and Senate Finance have similar bills that would initially draw 5.25 percent of the Permanent Fund’s average value over five years. The draw amount in Fiscal Year 2018 would be $2.5 billion, with about 25 percent of that supporting a $1,000 Permanent Fund dividend (PFD).

Walker’s bill (SB 26) has an additional percent-of-market-value (POMV) draw in Fiscal Year 2017, while Senate Finance’s bill (SB 70) ramps the annual draw down to five percent in FY 2022 and institutes a $4.1 billion spending cap.

Sen. Bert Stedman (R-Sitka) has a third plan, SB 21, with a 4.5 POMV draw. The bill evenly splits the resulting $2.2 billion between government services and PFDs. The PFD amount in 2018 would be $1,585.

Without further cuts or taxes, SB 26 and SB 70 would leave a deficit of $800 million in FY 2018. Stedman’s bill would leave a deficit of $1.6 billion.

On Monday, Stedman told Senate Finance that his plan is not designed to fill the deficit, but rather to protect the Permanent Fund.

During a relatively brief hearing Wednesday, two fiscal analysts from the Legislative Finance Division gave a side-by-side comparison of the three bills showing the practical implications of leaving a deficit that large.

The State’s main savings account, the Constitutional Budget Reserve (CBR), would be drained before FY 2026 under SB 21. When that account is empty, the State will need to begin pulling extra from the Permanent Fund Earnings Reserve Account (ERA) to fill deficits, eroding the real value of the Fund.

Under SB 21, the inflation-adjusted value of the Permanent Fund in FY 2026 will be 101 percent of its current value. It would be 106 percent under SB 70.

The extra FY 2017 draw in Walker’s bill, to be deposited in the CBR, means the Permanent Fund’s real value would be maintained, but not grown.

There is a mechanism in SB 26 and SB 70 that replaces existing inflation-proofing of the Permanent Fund. Any time the ERA balance exceeds four times the amount of the POMV draw, the excess is deposited in the constitutionally-protected portion, or corpus, of the Permanent Fund.

With the ERA balance currently around $10 billion, the inflation-proofing mechanism would be triggered shortly under SB 70, since it has no FY 2017 POMV draw.

“The choice of whether to have that [FY] ’17 draw under those plans as written today is essentially would you rather have that money in the principal of the Permanent Fund or the CBR?” Fiscal Analyst Alexei Painter told Senate Finance.

The Permanent Fund’s rate of return is 6.9 percent, as opposed to the CBR’s 2.8-percent rate of return. The tradeoff is money deposited in the Permanent Fund corpus cannot be appropriated if it is needed.

The Legislative Finance numbers assume the amounts forecasted by the Department of Revenue (DOR) in the Fall Revenue Sources Book. On the expenditures side, they assume paying the minimum amount of oil tax credits; a flat $180 million capital budget; and budget growth matching 2.5-percent inflation adopted in the Office of Management and Budget’s (OMB) 10-Year Plan.

Sen. Dunleavy Introduces His Own Permanent Fund Bill

Dunleavy, who is targeting $1.1 billion in unspecified budget cuts over four years, objected to the assumption of budget growth.

“We have not, as a Senate, adopted the OMB ten-year projections, correct?” he asked his Senate Finance colleagues.

Senate Majority Leader Peter Micciche (R-Soldotna) told Dunleavy that he requested use of the 10-Year Plan for a fair comparison. On Monday, Stedman used a flat budget, which made his plan look more durable in long-term modeling.

“Eventually, inflation pressures will catch up with us,” Micciche said.

In a Facebook post Monday, Dunleavy said he would introduce his own Permanent Fund bill that would not utilize a POMV or cut the PFD:

For many down here in Juneau, the political pain to cut coupled with the ire of special interest groups attached to state programs is too great to bear. Unfortunately, it appears there is no longer a clear separation between wants and needs. For too many in Juneau, everything now is an absolute need and thus cannot be cut.

The general feeling of many officials is that it will be less painful to tax you and/or take your PFD than to scale back government. While the focus is on revenue, the real issue in my opinion is expenditures. Until we hit the issue of expenditures head on, there will be no fiscal plan that is sustainable. By providing government with more revenue, you eliminate the main incentive to cut spending and find efficiencies. This is why I am not in favor of taxes or a major overhaul of the Permanent Fund to produce a steady revenue stream.

Dunleavy’s SB 84 was read across on Wednesday and referred to Senate Finance.

The bill maintains the current PFD calculation, which would make the 2018 PFD about $2,400.

It also stipulates that the legislature could not draw more than the amount for dividends — $1.5 billion in FY 2018 — to use for government services. A revenue limit in SB 84 would reduce the draw on a dollar-for-dollar basis when volatile oil revenue exceeds $1 billion.

DOR is projecting $750 million in FY 2018 oil revenue after deducting petroleum property taxes and corporate income taxes.

According to a presentation Legislative Finance Director David Teal gave to House Finance, the revenue limit in SB 84 would not be triggered until oil prices are between $60 and $65 per barrel. That is anticipated in FY 2019 or 2020.

A $1.2 billion revenue limit in SB 26 and SB 70 would kick in at $72 per barrel, probably in FY 2022.

SB 84 Draws Heavily on Permanent Fund, But Leaves Large Deficit

In FY 2018, government services would receive more under Dunleavy’s bill than under Stedman’s.

In fact, at $3 billion including PFDs, the total FY 2018 draw from the Fund would exceed any other Permanent Fund bill. It represents an effective draw of 5.2 percent. The next largest effective draw that has been proposed is 4.67 percent in SB 26.

Despite having the largest draw, because it holds the dividend harmless, SB 84 would leave a deficit of $1.2 billion that would have to be closed with savings, taxes, or Dunleavy’s preference, cuts.

However, if the legislature takes no action, it will have to fill a $2.7 billion deficit in each of the next nine years. The effective draw on the Fund will increase over that time as withdrawals from the ERA begin to cover PFDs and the deficit.

“Under status quo, just doing the current dividend appropriation, you’re at 2.66-percent effective draw and 7.5 percent in FY ’26 if you’re balancing the budget, which is obviously not a sustainable amount of draw,” Fiscal Analyst Rob Carpenter told Senate Finance.

The ERA would dwindle to $1.4 billion by FY 2026.

“This is, again, assuming you’re making dividend payments, even when you’re paying substantial amounts of money from the ERA for government,” said Carpenter. “The money would theoretically be there, but it would be crippling the Earnings Reserve Account and not necessarily wise policy.”

The real value of the Permanent Fund would decline to 92 percent in FY 2026 under the status quo.

Senate Finance Co-chair Anna MacKinnon (R-Eagle River) announced that her office will release Thursday a committee substitute for one of the Permanent Fund restructuring bills. Incorporating the ideas most favored by the committee, that CS will become the focus of deficit reduction in the Senate.

Senate Finance has not yet scheduled a hearing on SB 84.

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.

2 COMMENTS

  1. Walker, the GOP and Big Oil are continuing to plunder the budget reserve and the PF. The oil corporations are doing very well, because the former Chief Executive Officer of ExxonMobil, Rex Tillerson, now, Secretary of State, retired with a retirement package worth over $180 million.

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