Week 9 from Juneau: Budget progress but work aplenty remains

Both the state House and Senate have passed their separate versions of the state operating budget, the House on March 11 and the Senate on March 14.

With that done – or mostly done as sections of the operating budget still need work – legislators’ attention in the final weeks of the 2016 session is to focus on revenue measures.

At least that was the plan laid out earlier by House and Senate leaders.

The 2016 session hit its 60th day Friday, March 18, the two-thirds mark. Adjournment of the 90-day session is scheduled for Sunday, April 17.

In one development, the Senate State Affairs committee moved two major fiscal restructuring bills, one by Gov. Bill Walker and one by Sen. Lesil McGuire, out of committee. Both reorganize the way Permanent Fund earnings are managed and would make some of the earnings available for the state budget. They are now in the Senate Finance committee.

It was the first major action by a legislative committee on any of three proposals to restructure the way Permanent Fund earnings are used. Significantly, the Senate Finance Committee will take up McGuire’s bill, SB 114, on Tuesday, March 22.

The State Affairs Committee, chaired by Sen. Bill Stoltze, had held weeks of hearings on the proposals. The committee tweaked McGuire’s SB 114 but made no changes to Walker’s proposal.

In another development Senate leaders said last week they would not support any new taxes this year, which would appear to doom prospects for a separate fiscal reform proposal by the governor, for tax increases.

The state House has similarly shown little appetite for taxes.

As part of an overall fiscal package Walker introduced tax increases on fisheries, mining, oil and gas, tourism and fuel along with alcohol and tobacco. Walker also introduced a personal income tax.

The fuel tax increases have moved from transportation committees in both House and Senate to the Finance committees in both bodies, but with a provision that restores the current tax if crude oil prices increase.

There has been no movement among any of the other tax bills.

A revenue measure that appears likely this year, however, is in some way of tapping Permanent Fund earnings to support the budget. The Fund earns several billion dollars a year and its income has been increasing, in contrast with state oil revenue, which has seen sharp decreases.

Senate leaders have always said some way of using Fund earnings will be needed this year, and last week Senate Finance co-chair Sen. Pete Kelly, R-Fairbanks, reaffirmed his support for that.

House leader have been noncommittal.

But the way the Fund’s earnings would be used is all-important, particularly to the credit rating agencies like Standard and Poor’s and Moody’s.

If the Legislature simply appropriates funds from the Permanent Fund’s Earnings Reserve Account, which it can legally do, the action will be seen as a simple, ad-hoc cash grab on Wall Street and would tend to further diminish the state’s reputation and creditworthiness.

However, if the earnings are appropriated through a structured approach, such as proposed in any or three separate fiscal plans now before the Legislature, the ratings agencies have said it could have the opposite effect, of boosting Wall Street’s confidence that Alaskans are capable of devising a fiscal plan.

Two of the fiscal plans, Sen. Lesil McGuire’s SB 114 (a House version is HB 303, by Rep. Charisse Millet) and Rep. Mike Hawker’s HB 224, would adopt a percentage-of-market-value, or POMV, payout rule for the Permanent Fund, a procedure commonly used by large endowments. In both bills a 4.5 percent payout is used. The payout from McGuire’s POMV proposal was lowered from 5 percent to 4.5 percent in the committee.

Hawker’s bill would generate between $2 billion and $2.5 billion yearly over the next five years, assuming it was adopted this year.

McGuire’s bill would generate a similar amount of money after the payout change.

Gov. Bill Walker’s proposal, in HB 245 and SB 128, is different. It would have the Legislature appropriate a fixed sum for the budget – about $3.3 billion annually in the legislation. This amount would be at a level that would leave enough earnings to sustain the Fund.

The fixed draw is a defining characteristic, said Attorney General Craig Richards, because it would make a specific amount of money available for the budget each year, creating stability in the state’s budgeting.

The weakness of the alternative POMV approach, Richards argued, is that it is still volatile, shifting unexpectedly with market changes and injecting uncertainty in budgeting.

Richards’ remarks came in a presentation to the Senate State Affairs Committee last Tuesday, March 15.

One important difference with the governor’s plan, however, is that it requires the Permanent Fund, and the Fund’s Earnings Reserve Account, to be “bulked up” by injecting more money.

For the reserve account the money would be transferred from the Constitutional Budget Reserve, another state savings fund. The transfer of funds from the Constitutional Budget Reserve to the earnings reserve would require a three-quarters vote of the Legislature.

One feature of all the proposals is that the Permanent Fund dividend would decline, at least in the near term, and vanish in the case of Hawker’s bill, although it would be restored possibly in future years if the state’s overall revenue situation improves.

In Hawker’s bill money from Permanent Fund earnings would go first to pay the state’s budget and to pay down the budget deficit. After that money would be made available for a dividend.

McGuire’s bill would retain a dividend as would Walker’s proposal, although in both the source of funds would change from earnings of the Fund to a share of state oil and gas royalties.

Since royalties will most likely decline over the years as production drops the effect would be a gradual reduction in the dividend payment. The lower dividend, over time, would make more money available for the budget.

On other issues pending, on Monday the House Finance Committee is due to take up the Medicaid reform bill passed by the Senate last week.

It is SB 74, sponsored by Sen. Pete Kelly, R-Fairbanks, and 12 co-sponsors. A House Medicaid reform bill, HB 227, sponsored by Rep. Paul Seaton, R-Homer, is also in the House Finance Committee after having passed earlier out of the House Health and Social Services committee, which Seaton chairs.

The bill makes key changes in how the state will administer Medicaid, which is a health care program for low-income people paid for roughly equally by the state and federal governments.

The program has grown in costs in recent years and even the state 50 percent share has become a major expense in the state budget.

The Senate bill seeks to lower costs by, among other changes, requiring coordinated primary care for Medicaid recipients who frequent costly hospital emergency rooms; instituting a demonstration project of a larger coordinated care project among Medicaid recipients, and a study of merging all state-paid health care plans for public employees including teachers.

One other issue being worked hard in the state House is an overhaul of the state’s complex oil and gas tax credit incentive program, which has also become very costly.

For weeks the House Resources committee has been at work in a detailed review of the tax credits through HB 457, a bill proposed by the governor to reshape the program.

Another bill by the governor, HB 246, is also before the committee. It would expand the ability of the state economic finance corporation, Alaska Industrial Development and Export Authority, with funding of infrastructure related to small or medium-sized oil and gas fields.

HB 246 had its first hearing in the House committee last week.

A controversial feature of HB 247, oil and gas tax credit reform, is a proposal by the governor to increase the state’s minimum production tax on oil from 4 percent to 5 percent.

It’s not clear what the Resources committee will do with these  bills. A proposed committee substitute is being developed and one or both bills may move out of the committee next week.

There is still a long path ahead, though. The House Finance committee will put its mark on the legislation, and if the bills get to the Senate, senators likely have their own ideas.


Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]

03/18/2016 - 2:47pm