JUNEAU — Friday, April 8, was Day 81 of the 2016 legislative session with nine more days to the scheduled adjournment, April 17.
Things are normal for this point in the session: Murky.
The hallways are surprisingly quiet. Legislators seem mostly huddled in their offices. The Finance committees, which is where the action is now, come to life at 5 p.m. when the big bills are brought up. Meetings typically go into the evenings.
This session has huge policy issues at stake: Criminal justice reform, health care and Medicaid, a revamp of oil tax credit incentives, and the elephant in the room, a pending reorganization of state finances.
This list doesn’t include the budget, which is less than one-third funded with revenues and has a huge $4 billion-plus deficit.
With about a week left session none of these things are resolved. That’s normal, because legislators always hold their cards close and wait until the very end to maximize their negotiating strength.
This year that seems to be a dangerous path particularly with the fiscal policy legislation and the budget, because the stakes are so large. Solutions are at hand, meanwhile. They involve using the ample earnings of the state’s $50 billion-plus Permanent Fund and spending cuts and some new taxes that will likely come next year.
The spending cuts are being made. Both the House and Senate have trimmed several hundred million dollars from the operating budget, although the final total has yet to be determined.
Lawmakers now have to make decisions on using Permanent Fund earnings but being politicians they worry about constituents’ reactions and getting reelected later this year.
The bills are the governor’s Senate Bill 128 in the Senate and House Bill 245 in the House, and Sen. Lesil McGuire’s SB 114 in the Senate and a similar House bill, HB 303 by Rep. Charisse Millett. Rep. Mike Hawker’s bill is HB 224.
Doing nothing about fiscal reform has big consequences, too, because the big deficit will cause state cash reserves will shrink further, and business confidence will sink. If that happens the state’s economy, already battered by low oil prices and layoffs, would worsen.
Work on the fiscal policy reforms have been frustratingly slow and the outcome is still a black box. But on oil tax credits, House Bill 247, at least a framework for a solution is in place.
In a normal year any one of these policy issues would be big undertakings but to have a several happening in one session is unusual, and stressful, for legislators.
But if things are still murky on fiscal policy and oil tax credits, the brighter note is that there is good progress the two other big issues, Medicaid and criminal justice reform.
Things are fairly far along on Medicaid and health care legislation, in Senate Bill 74, as well as criminal justice reform in Senate Bill 91, both which promise future savings for the state budget.
SB 74, on Medicaid, passed the Senate unanimously and is now about to emerge from the House Finance committee, ready for action by the full House.
Reforming this program is critical for the state budget. Medicaid is the state-federal health care program for lower-income Alaskans and its cost to the state has soared in recent years to several hundred million dollars annually.
It is now the single-largest state expenditure behind education, and it is still growing. Without reform, the size of the Medicaid budget will seriously undermine state finances in a few years.
The Senate bill was originated by Sen. Pete Kelly, R-Fairbanks, the co-chair of the Senate Finance committee, and it and now with a broad backing of co-sponsors.
Among other things it would reorganize the program’s administration, introduce Medicaid recipients to coordinated care led by primary care physicians and eliminate over-reliance on hospital emergency rooms, now a huge expense.
There will be improved medical outcomes too, sponsors of the legislation say, because patients will get the right care at the right time, which many now do not get.
SB 74 has ramifications for all Alaska health care, too. It authorizes wider use of telemedicine, for one thing, which will induce new competition in health care and will likely bring costs down.
Telemedicine has long been practiced successfully in Alaska’s big Tribal health care organizations serving rural Alaska and it is widely used for in other states’ health care systems, but not so far in Alaska.
The telemedicine sections come from legislation sponsored separately by Sen. Peter Micciche, R-Kenai, who built on ideas from previous efforts at telemedicine by former Sen. Fred Dyson and Rep. Lynn Gattis, R-Palmer, a current House member.
As prime sponsor, Kelly early on championed managed care and was a key driver for those parts of SB 74 and other parts of the bill reflect proposals for Medicaid reform put forth by the Department of Health and Social Services. There are also sections strengthening the state’s ability to protect Medicaid from fraud.
Criminal justice reform
The reforms in criminal justice, in Senate Bill 91, have been in the works for years and are led this year by Senate Majority Leader John Coghill, R-Fairbanks, and House Majority Leader Charisse Millet, R-Anchorage.
Greg Razo, a member of the Alaska Criminal Justice Reform Commission, the architect of SB 91, told legislators in a briefing last week that it costs $55,000 a year to keep a person in prison, and that about half the Alaskans now incarcerated are there for low-level, nonviolent crimes, most simply awaiting trial.
The bill is estimated to achieve savings of $424 million over 10 years, Razo said. That will come mainly by reducing the number of Alaskans convicted of low-level crimes going to prison, as well as by avoiding the cost of building a new prison expected to be needed in 2017.
The bill also sets out initiatives like treatment and social services to ease re-entry after prison to reduce recidivism, or the return to jail by inmates released, but who, lacking support, return to crime. The legislation is expected to reduce the prison population by 21 percent over 10 years, Razo said.
SB 91 has been worked on all session in the Judiciary Committee and more recently in the Senate Finance committee, which reported the bill out on Thursday, April 7. The bill is now ready for floor action in the Senate. Meanwhile the House Judiciary Committee has been working on a similar House bill, sponsored by Millet.
On the oil tax credit bill, a revised version of House Bill 247, sponsored in its original form by Gov. Bill Walker, is in the House Finance committee, which worked on the bill into the weekend, April 9 and 10.
Earlier the House Resources committee made substantial changes to the bill introduced by the governor after working for several weeks on the measure.
Meanwhile the Senate Resources committee is also working on a Senate version of the bill, on a parallel course with the House committees.
Walker’s intent in introducing HB 247 was to sharply scale back the incentive program to reduce its cost, which reached $700 million last year until the governor vetoed $200 million, but promising to eventually pay the credits.
Without changes the program will cost similar amounts this year and next, which with $4 billion-plus budget deficits the state cannot afford, the governor has argued.
The original HB 247 would almost immediately have slashed many of the tax credits and would have also raised taxes on the industry by first raising the minimum production tax paid on the North Slope form 4 to 5 percent and, secondly, by changing the minimum production tax so that companies cannot bring their tax below it by applying certain of the tax credits, a move to “harden” the minimum tax.
The House Resources Committee changed a lot of this, first eliminating the tax increase and the move to harden the minimum tax and secondly by phasing over three years the elimination of several tax credits the governor would cut in one year. That was done to help companies who are in the midst of developing new projects who would be harmed by a sudden change in the tax rules.
However, while the Resource committee intent was to soften the effects of HB 247 on an industry hard hit by oil price declines, the effect was also to raise the cost of the credits to the treasury back toward the current level.
After leaving the Resources Committee the bill went to the House Finance committee, which is interested in the effects of the bill on the state budget.
The new version of HB 247, now being worked in House Finance, strikes a middle ground between the governor’s bill and the changes by the Resources committee.
The new bill also dings the big North Slope producers, which the Resources bill mostly did not. It brings back the “hardened” minimum tax but puts it at 2 percent. The minimum tax is still 4 percent but circumstances remain where tax credits can lower the tax but not below 2 percent in the current version.
The pending Finance version goes further by terminating after five years tax reductions in current law for producers for new oil developed on the slope. The pending House committee bill also makes changes in the several tax credits for Cook Inlet, but also terminates a production tax holiday for oil produced in the Inlet in 2017 instead of 2022, which is the current law.
Permanent Fund earnings
It’s still unclear what legislators will do on the overarching question of the 2016 session, which is what to do about tapping Permanent Fund income to cover part of the huge budget deficit.
Hearings were scheduled in the Senate Finance committee on the two Permanent Fund and fiscal policy bills, SB 114 and 128, but were canceled, a signal that the committee is still working on its plan for the bills.
Although the Fund’s earnings, which are typically several billion dollars a year, can be appropriated by the Legislature under current law, the governor is urging that this be done in a structured way, with a set amount taken.
That’s needed to ensure the draw won’t endanger the long-term solvency of the Permanent Fund, and will be transparent enough to instill confidence by the public and financial institutions.
Financial rating agencies that are now watching Alaska have warned that a simple “grab” of cash by the Legislature of funds in the Permanent Fund’s Earnings Reserve won’t be sufficient to forestall another downgrade of Alaska’s credit.
In presentations to legislative committees last week Revenue Commissioner Randy Hoffbeck and Attorney General Craig Richards urged lawmakers to adopt a mechanism, such as one proposed by the governor, so that clear rules are set out as to how the Fund’s earnings are drawn.
Walker’s proposal involves transferring other state reserve funds, in particular $3 billion in the Constitutional Budget Reserve, into the Permanent Fund’s earnings reserve to “bulk up” that account to about $10 billion.
At that level the reserve account can sustain annual fixed draws of $3.3 billion with the withdrawal covered each year by new earnings of the $50 billion-plus Fund. The governor’s plan makes other changes too including diverting more oil royalties into the principle of Permanent Fund.
The alternative idea being discussed is changing the Permanent Fund to function more like an endowment, with a set percent of the market value of the entire Fund drawn each year. This idea, in McGuire’s Senate Bill 114, has the percentage set at 4.5 percent and the annual draw estimated at about $2 billion per year.
Hawker has a similar endowment-type plan in his HB 224, also with a draw of 4.5 percent.
However, the plans also change the way the annual Permanent Fund dividend is calculated and would reduce the dividends, in effect making more money available to the state treasury.
This is causing great concern among lawmakers who worry about how constituents will react to reductions of the dividend, which was more than $2,000 per citizen last year.
“You are achieving stability in the budget but you are doing it by reducing the people’s dividend,” Rep. Tammie Wilson, R-North Pole, told revenue commissioner Hoffbeck and Attorney General Richards last week in a committee hearing.
However, under the current fiscal situation there won’t be a dividend at all in four years given the rapid drawdown of state reserves.
The uneasiness over the pending elections has prompted some moves to avoid adopting a structure, which could affect the dividend, and just appropriate money from the Permanent Fund’s reserves.
Members of the Senate Majority were reported last week to be hunting for enough votes — 11 are needed — to do that that withdrawal. As of April 8 they have been unsuccessful.
There are similar sentiments among some House Republicans, and while House leaders like Speaker Mike Chenault, R-Nikiski, and Rules chair Rep. Craig Johnson, R-Anchorage, are playing their cards close, both have made statements expressing caution about simply raiding the earnings reserve.
“Doing nothing is not an option. There has to be some kind of new revenue stream,” Chenault said Thursday, April 7, in the House Majority’s weekly press briefing.
Johnson said, “Grabbing the Permanent Fund money (in the earnings account) seems like the easiest thing but it may not be the best thing to do.”
Rep. Kurt Olson, R-Soldotna, who chairs the House Labor and Commerce Committee and is part of the House leadership, has gone further, having his committee introduce a bill levying a tax of 35 percent on a Permanent Fund dividend, which would be a form of income tax. That bill is HB 376.
Although it can’t be interpreted as any kind of signal, the House Finance committee also held hearings HB 365 on a bill to reimpose a personal income tax sponsored by Rep. Paul Seaton, R-Homer.
Tim Bradner is a correspondent for the Journal. He can be reached at [email protected]