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Budget Headed for Vote in the House, Permanent Fund Restructuring Bill in the Senate

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Two multi-billion-dollar bills are ready for votes. On Friday, the House sent the Fiscal Year 2018 operating budget to the floor, while the Senate Finance Committee moved a Permanent Fund restructuring bill that would partially fund that budget.

After three days of hearings on amendments, House Finance moved a committee substitute for HB 57. The vote was along caucus lines.

The budget represents growth from FY 2017 of about $35 million, including federal funds.

Unrestricted general fund (UGF) growth totals $70 million. This is the number most often cited because it is used to calculate the deficit.

The budget is larger than FY 2017 because the House budget allows for a Permanent Fund dividend (PFD) of $1,150. Walker vetoed the PFD last year to $1,022, a difference of $100 million UGF.

Agency operations — the day-to-day cost of government — sees a reduction of $114 million UGF, or $62 million when designated general funds are included.

Rep. Lance Pruitt (R-Anchorage) said during a hearing that Alaskans will be disappointed there were no further cuts.

“They wanted us to cut the budget, and they wanted us to work together on it,” he said. “They wanted us to accept the reality that the Alaska of tomorrow will not look like the Alaska that we’ve just come out of.”

House Finance Co-chair Paul Seaton (R-Homer) noted that the House pulled out $1.2 million in savings from wage freezes proposed by Gov. Bill Walker (I-Alaska) but not yet approved by the legislature.

After public testimony, House Finance added $71 million to the budget via amendments. Most of that comes from restoring $66 million for school construction the committee cut  earlier in the week.

The committee also added $1.2 million for pre-Kindergarten. An amendment passed prior to public testimony added $6 million to fully-fund pupil transportation, reflecting what Seaton called the “philosophies and the priorities of the [House] majority.”

“This budget now is an increase from what we got just a few days ago. We added things back in,” reacted Rep. Tammie Wilson (R-North Pole).

Wilson submitted most of the 330 amendments considered by House Finance. None of her suggested cuts were adopted.

“I guess I was really surprised that there’s not a single thing that any of these Republicans could offer that you guys could get behind,” Pruitt told majority members.

“Thanks for proving to the public that we can’t get along,” he said sardonically. “There is no bipartisanship in this building.”

House Finance did adopt two amendments from minority member Rep. Steve Thompson (R-Fairbanks) adding four State investment officers. At a cost of $900,000, the investment officers are expected to save $30 million per year in management fees.

Nevertheless, Pruitt said the outcome of amendments was predetermined, with subcommittee chairs arguing against minority cuts by reading from scripts.

“It wasn’t even a debate,” he said. “We may have spent time, but it doesn’t mean that we actually had the conversation.”

Floor amendments will be taken up Monday.

All majority members made a recommendation of “do pass” on the budget. With a recommendation of “amend,” Thompson was the lone minority member to offer a recommendation other than “do not pass.”

Rep. Gara: House Budget Keeps Social Contract

“Increasing state spending during a fiscal crisis is just unacceptable,” House Minority Leader Charisse Millett (R-Anchorage) tweeted Friday. “We need to have [a] Budget that reflects reality.”

But House Finance Vice-chair Les Gara (D-Anchorage) pointed to cuts to agency operations and the $3.5 billion in budget cuts since FY 2013.

“It’s continuing to cut the budget,” Gara said of the House proposal. “Anyone who wants to argue this is a budget increase is not using the numbers.”

“This is a rational budget that minimizes the harm, instead of maximizes the harm,” he said. “At some point, you have to fund schools, and you have to have a university… It really doesn’t work to tell a family that, ‘You know, I know we didn’t get the education your child deserved in fourth grade, but in a few years, we’ll get them the education they deserve.’

“You can’t do fourth grade again.”

In lengthy remarks that referred to Wilson’s amendments, Gara told House Finance, “While some of this is about numbers, a lot of it — the bigger part — is about human beings.”

You can cut those things, like was proposed: cutting education; cutting pre-K so children will succeed in smaller numbers. You can cut suicide prevention, like was proposed. You can cut domestic violence shelters, like was proposed. You can cut food banks, like was proposed. You can cut homeless shelters for youth who have no place to live, like was proposed. But at some point, you’re ripping up the fabric of this society. You’re ripping apart the contract between those of us who have something and live in comfortable homes and those who live with difficulty. There is a contract between us, and this budget keeps that contract together, even with budget cuts… Cutting domestic violence shelters is cutting for cuts’ sake. I think cutting pre-K is cutting for cuts’ sake. I think continually cutting K-12 education is cutting for cuts’ sake.

Rep. Cathy Tilton (R-Wasilla), who also had a large number of amendments rejected by House Finance, was unmoved.

“Rather than asking ourselves can government provide or perform a service better or more efficiently, we have to ask the tougher question: should government be providing the service at all?” she said. “In all honesty, how much spending has been reduced since FY ’15 isn’t particularly a compelling argument to my constituents right now. They’re looking at a $3 billion fiscal gap, and they’re looking at monies coming from their pockets.”

Senate Leaders Agree Cuts Have Been Made, Turn to Permanent Fund

The Senate Finance Committee moved a bill Friday that would close $1.8 billion of that fiscal gap by drawing 5.25 percent of the average market value (POMV) of the Permanent Fund over five years.

Though the bill number is Walker’s SB 26, the committee substitute adopted Thursday by Senate Finance rolls the committee’s deficit reduction plan into SB 26 with one correction: the POMV draw is reduced to five percent in FY 2021, rather than FY 2022.

At that point, PFDs under the bill would move from a fixed $1,000 to 25 percent of the POMV draw. They are expected to still be roughly $1,000 and grow from there.

Like Tilton, tax avoidance is at the forefront of Senate Finance members’ minds.

However, Senate leaders indicated Friday that the majority of cuts that are politically possible have already been made.

“The people of Alaska have been — from my community — shouting for reductions in government, that we need to cut government,” Senate Finance Co-chair Anna MacKinnon (R-Eagle River) said in a hearing. “Some people across our state believe that they don’t need State services. They may forget that they travel on roads that cost large amounts of money to clear and maintain. We travel on airports that are maintained with some State funding. Ports, ferries, emergency services, firefighting, emergency evacuation — We’re a large state. We don’t have counties, and the State has been the holder of those responsibilities for years.”

Early Senate subcommittees have mostly matched the subcommittee recommendations  in the House.

Senate Majority Leader Peter Micciche (R-Soldotna) said the Senate will try to cut more.

But, Micciche warned, “You get into a significantly deeper level of cuts, and I tell you, you’re going to look seniors in the eye that can no longer count on the basic level of services or 50 kids in a classroom or not having someone respond when your family’s in a vehicle on its side on the Sterling Highway and the nearest Trooper’s two hours away. These are basic, constitutionally-required services as important as the Permanent Fund, and I will fight to protect all of them.”

“Can anybody look me in the eye and tell me that we’re meeting our constitutional requirements today on delivering public safety in Alaska?” Micciche asked his Senate Finance colleagues.

“Nobody wants to cut schools. Nobody wants to cut benefits for seniors,” responded Sen. Mike Dunleavy (R-Wasilla), an opponent of restructuring the Permanent Fund.

However, Dunleavy said his constituents sense more opportunities for cuts when they see things like the $120,000-per-month contract of former gasline advisor Rigdon Boykin.

MacKinnon pointed to a 44-percent reduction in State spending since FY 2013. She suggested more cuts would struggle to make it through the House.

“We have a problem, and the problem that faces each of us at this table and in communities across Alaska is that we’ve been drawing from our savings,” she told committee members.

Over the last six years, MacKinnon said, the State has spent between $10 billion and $12 billion from savings.

“We’ve lost the opportunity for those savings to generate revenue that could have benefited Alaska,” she said.

MacKinnon argued SB 26 is necessary because, unlike when oil hit nine dollars per barrel, price and production are both an issue.

“We could wait, but there is a cost to waiting, and we’ve been waiting for five years now in hopes that we would see revenue turn up… that the oil price would recover substantially,” she said.

“I’ve heard about taxes, that taxes need to be a part of the solution, and I adamantly disagree,” MacKinnon said, arguing that SB 26 closes enough of the fiscal gap.

Micciche reported that in constituent surveys, 60 percent favor restructuring the Permanent Fund. An income tax is the least popular option, he said.

“I think taxes will be the death of Alaska’s future,” Dunleavy agreed.

Of the limited options left to the legislature, MacKinnon said the State could shift more costs to municipalities, like Senate Finance unsuccessfully tried last year.

“Our communities then would start trying to charge our property taxpayers more money,” said MacKinnon. “My community is saying rural Alaska is not contributing what they should towards education, the largest single cost driver for the State of Alaska.”

Sen. Donny Olson (D-Golovin) noted that the resources upon which Alaska depends come from rural Alaska, yet many villages don’t have basic infrastructure, like sewer.

The lone minority member on Senate Finance, Olson said he is hearing from other senators that they are satisfied with restructuring the Permanent Fund without adding taxes.

“Therefore, grave reservations are welling up within me,” he said.

Senate Finance Members Tell Sen. Dunleavy It’s Time to Vote

Commissioner Randall Hoffbeck defended the mechanics of SB 26 before Senate Finance.

“There was extensive modeling done to determine what the maximum draw could be made for use of paying the dividend and paying for government services and still protect the corpus of the Fund and allow it to grow at a rate of inflation over time,” he said.

The model indicates that, if the remainder of the deficit is closed, the Permanent Fund Earnings Reserve Account (ERA) will hit zero less than one percent of the time under the plan.

“That essentially says, ‘No, it will not fail,’” Hoffbeck said.

In addition to the POMV reduction to five percent, the bill includes a three-year review.

“If we see that we’re drawing too much, we will come back to the legislature and say that the draw is starting to deplete the corpus of the Fund and recommend changes. The idea isn’t to put this in place and just let it sit for 20 years; It will be monitored to make sure that it doesn’t impact the value of the Fund over time,” Hoffbeck said. “The idea is that the Permanent Fund is to be multi-generational. In order for that to occur, we have to let it grow with inflation.”

A revenue limit in the bill reduces the POMV draw on a dollar-for-dollar basis when oil revenue exceeds $1.2 billion, first triggered around oil prices of $72 per barrel.

Hoffbeck said the revenue limit prioritizes the use of oil revenue over Permanent Fund earnings and holds down spending.

“By beginning to turn the use of the earnings reserve off when it’s no longer necessary in order to fund government services, you prevent the issue of superheating government expenditures,” he said.

Dunleavy disagreed that the bill holds down spending. He pointed to a provision in the House budget that draws $2.5 billion from the ERA to fund services and dividends. It also draws $1.7 billion in FY 2017 to forward-fund education, closing the deficit and limiting the House minority’s bargaining power over budget funding.

Pruitt hinted that the Senate will not agree to the FY 2017 draw.

“At some point in time, you think that you’re not going to need us, but you are,” he warned majority members in House Finance Friday.

“The House is anticipating, or hoping to move, billions of dollars out of the ERA,” Dunleavy told Hoffbeck. “This bill does not necessarily prevent that from happening because it is a statute.”

“It is statutory,” admitted Hoffbeck, “and the legislature still has the power of appropriation.”

“The earnings reserve has always been available for appropriation,” Hoffbeck added. “For 30 years, the legislature has not tapped that for additional funding.”

“That decades-old understanding or relationship ended this year. It’s done,” Dunleavy declared, referring to the House budget. “I’ve become convinced, after looking at these attempts to get into the ERA, that it’s not protected, and the only way we’re ever going to protect this Fund is if you constitutionalize it.”

“When people understand the decision that’s in front of this body and why this is occurring, they have been very supportive of it,” Hoffbeck said of restructuring the Permanent Fund.

However, when Dunleavy asked if the Walker Administration would support a citizen advisory vote on SB 26, which Dunleavy wants to happen in September, Hoffbeck responded, “We think the decision needs to be made now.”

“I think there’s a real concern that the people wouldn’t have the necessary information to be able to evaluate the use of the earnings in this fashion,” Hoffbeck elaborated. “We felt like the legislature has the greatest amount of information. They have the greatest idea what they’re facing and are in the best position to make the decision on the proper use of earnings reserve to balance the State’s fiscal situation.”

“We are the elected officials,” Senate Finance Co-chair Lyman Hoffman (D-Bethel) reminded. “I think that the vote that I take on this particular piece of legislation and the vote on the floor will assure a more solid future for the state of Alaska, will protect the Permanent Fund, and will protect the Permanent Fund dividend. Inaction is not a solution, is not an option.”

“Leadership is not easy,” added Micciche. “It’s about being the most informed on a subject and being able to go home and look your constituents in the eye and explain to them why you voted a certain way.”

“We’re only here sitting today talking about the Permanent Fund because the people of Alaska put it in the constitution,” argued Dunleavy.

He tallied the reduction of the PFD over the next three years if SB 26 passes.

“That’s over $2 billion out of the private economy that goes into the government,” Dunleavy said.

“If we do not take action, the dividend would go away,” countered Hoffman.

“We have to pay our bills,” agreed Hoffbeck. “At some point in time, the [Constitutional Budget Reserve] will be depleted and we would start using earnings reserve. As we start to spend down the earnings reserve, we start spending the money that not only pays for government services, but pays for the dividend, as well.”

Dunleavy framed that argument as a reluctance to cut the budget further.

“The dividend would go away because of our actions at this table, as politicians, to deal with the budget,” he said. “Even under this plan, there will be a gap of several hundred million dollars that has to be closed.”

Hoffbeck agreed, noting the legislature’s options are to tax, cut, or pull the balance from savings. That’s why the administration is advocating for statutory rules on the POMV draw that discourage unplanned withdrawals, he said.

“The one that would be the easiest would be to use your savings,” Hoffbeck warned Senate Finance.

“There’s nothing easy about this choice,” responded Micciche.

SB 26 could be debated on the Senate floor as early as Monday.

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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