Senate puts forth spending cap, annual Fund draw

Senate Republican leaders have put forth their own plan to employ the Permanent Fund for deficit reduction that nearly matches Gov. Bill Walker’s proposal.

The one marked difference is the Senate Majority’s legislation, Senate Bill 70, includes a $4.1 billion spending limit on unrestricted General Fund appropriations for the annual operating budget.

The operating spending cap exempts state debt payments, appropriations to the Permanent Fund, dividend amounts and the capital budget. It would be adjusted for inflation based on the Bureau of Labor Statistics yearly inflation calculation for Anchorage. The federal agency does not calculate inflation for Alaska as a whole.

SB 70 is formally a Senate Finance Committee bill. Finance Co-Chair Sen. Anna MacKinnon, R-Eagle River, and Majority Leader Sen. Peter Micciche, R-Soldotna, took questions on the bill during an introductory press conference Feb. 27.

Such a statutory spending limit is unenforceable in the long-term, but Senate Republicans are also prepping a new Constitutional spending limit that could first go before voters on the fall 2018 general election ballot.

House Majority Leader and Anchorage Democrat Rep. Chris Tuck made it clear in a Feb. 28 press briefing that he wants a package of fiscal reforms alongside changes to how the Permanent Fund is used, calling the Senate Majority proposal a “lazy plan.”

Tuck said he hopes the Senate leaders will be open-minded to new ideas.

“Alaskans don’t want to see a change to the Permanent Fund until there is a change to oil tax subsidies,” he said, referring to another issue the House Majority has made a priority in its budget plan.

SB 70 establishes an annual 5.25 percent of market value, or POMV, draw from the Earnings Reserve account of the Fund, from which both dividends and government services would be funded.

The initial POMV draw equals that in the Permanent Fund bills submitted by the Walker administration, House Bill 61 and Senate Bill 26.

The Republican-dominated Senate also passed legislation during a special session last year that was virtually identical to what the administration submitted this year. That bill failed to pass the House Finance Committee by 5-6 margin in a close and contentious vote.

A 5.25 POMV draw based on a five-year rolling average of the Fund’s value would make about $1.8 billion available in fiscal year 2018 to close the nearly $3 billion ongoing budget deficit, in addition to money set aside for Permanent Fund dividends.

The POMV amount destined for the General Fund would grow to more than $2.1 billion by 2023 without degrading the Fund’s real value if the Alaska Permanent Fund Corp. can continue to produce its historical average annual return of 6.9 percent.

Administration officials and independent consultants have called a 5.25 POMV draw “aggressive but sustainable” and SB 70 would reduce the draw to a 5 percent draw in fiscal year 2021.

According to Legislative Finance modeling, the Permanent Fund in 2026 would have a real value equal to 102 percent of the Fund’s current value under SB70.

The Permanent Fund held an unaudited balance of $57.1 billion on Feb. 24, according to the corporation. On Jan. 1 it held $55.4 billion in total assets, about $10.3 billion of which was in the spendable Earnings Reserve account.

Using a $50 billion Permanent Fund as a starting point, each 0.25 percent change amount equals about $125 million more to draw or to keep in the Fund, Legislative Finance Division officials have said as well.

Both the Senate Finance and administration proposals also have dividend formulas that pencil out yearly checks to eligible Alaskans in the $1,000 range for the foreseeable future.

However, the governor’s plan would set aside a smaller portion of the POMV amount for dividends and supplement that with 20 percent of available resource royalty payments in a given year. The Senate Majority’s plan, SB 70, would directly dedicate 25 percent of the POMV draw for dividends and equates to a 1.31 POMV dividend appropriation.

Walker has said he supports tying at least part of the dividend to royalties to better connect it to the state’s fiscal situation, but that just means more shifting of money within the available General Fund pot.

SB 70 guarantees $1,000 dividends for three years; the governor’s plan does so for two.

The longstanding PFD formula is half of a five-year rolling average of the Fund’s annual investment income.

Another small but significant difference is in when the bills would take effect. The administration’s Permanent Fund Protection Act has an immediate effective date so a draw could be made to cover part of the fiscal 2017 deficit and pull less from the dwindling Constitutional Budget Reserve.

SB 70 has a July 1, 2017, effective date, which is the first day of the state’s 2018 fiscal year and thus would the first draw would go towards the 2018 deficit.

The Department of Revenue expects to have about $4.4 billion left in state savings accounts, nearly all in the CBR, at the start of fiscal 2018.

Both plans do include triggers to reduce Fund draws equal to the amount that unrestricted state oil and gas revenues exceed $1.2 billion in a given year. At current production levels that would happen at about $70 per barrel. Prices are currently about $55 per barrel.

The draw reduction would be another way to limit spending and also be a way to boost the size of the Earnings Reserve.

Coinciding with the draw reducer, they also have an inflation-proofing mechanism that injects excess earnings into the corpus of the Fund once the Earnings Reserve account is four times the latest POMV draw.

The system provides a cushion that allows for annual draws in the event of successive years with poor investment returns, Revenue Commissioner Randy Hoffbeck described in previous testimony to House Finance.

Other Fund proposals include a 4.5 POMV draw split equally for dividends and government from Southeast Republican Sen. Bert Stedman.

While its simplicity is a benefit, Stedman’s Senate Bill 21 would make less than $1.2 billion available for appropriation and thus leave a much larger budget deficit.

The 2018 dividend under SB 21 would be $1,700 per Alaskan.

Stedman voted for the Permanent Fund Protection Act when it passed the Senate last year.

Rep. Paul Seaton, R-Homer, also has legislation to institute a 4.75 POMV draw in House Bill 115.

Seaton, co-chair of House Finance, is proposing to tie PFDs, which would come from one-third of the POMV draw, to an income tax, ostensibly making the PFD a tax credit for individuals with a state income tax liability.

Members of the Democrat-led House Majority coalition have pushed for an income tax as part of a comprehensive deficit fix to offset the regressive impacts smaller dividends would have on low-income individuals.

Micciche said during the Feb. 27 press briefing that the Senate Majority, which is pushing for $750 million in additional spending cuts over the next three years, wants to “isolate” a Permanent Fund restructuring from other political contingencies such as broad based taxes or more drastic cuts because it is the one piece to solving the budget puzzle that must be employed.

“Everyone in the Legislature knows this bill needs to pass,” Micciche said. “Now, they say different things about it and at election time (last year) they said some things about it that perhaps didn’t make it sound like they knew it needs to pass, but if you ask them quietly in the halls all 60 legislators know it needs to pass.”

To that end, Micciche said he will consider the 2017 legislative session a success if three bills — the operating and capital budgets and a Permanent Fund bill — pass. He said the governor, who has stayed in the background so far this session, has indicated a similar sentiment.

With the Senate Majority’s prescribed cuts, SB 70 would solve about 90 percent of the $3 billion budget deficit, Micciche added, noting taxes will inevitably be the next step if oil prices plunge again.

Senate Republicans are also taking aim at further reforms to some of the state’s largest budget drivers. Doing so will require additional legislation, which is likely to come next year if the Permanent Fund piece is resolved this spring.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

Updated: 
03/02/2017 - 7:43am

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