The Senate Finance Committee reviewed a bill which could end up reshaping the future of the state’s finances last week.
As with two other bills under consideration, the Permanent Fund Protection Act (Senate Bill 26) would arrange the Permanent Fund’s Earnings Reserve Account – from which the state’s annual dividends are paid out – so that the amount of money drawn from the earnings would be tied to an historical average of percent of market value (POMV).
Proposed by Gov. Bill Walker, a percentage of the ERA under this new regime would then be split between dividends and agency spending, helping to cover a portion of the state’s ongoing budget deficits. The Office of Management and Budget is currently looking at a $2.7B budget deficit for Fiscal Year 2018, if this year’s budget is retained unchanged.
During Friday morning’s hearing, commissioner of the Revenue Department Randy Hoffbeck was called on to testify to the bill’s financial impact.
The bill would set up how the ERA would be tapped, and would set the POMV limit at an aggressive 5.25-percent withdraw rate from the Fund. In the event of state surplus through mineral and petroleum royalties above $1.2B, the proportion withdrawn for agency operations would be reduced by match.
“What this does is actually just prioritizes which money gets spent at a time when you have excess revenues. Oil and gas tax revenues would get spent first beforehand, and you would stop spending the earnings from the permanent fund for government services,” Hoffbeck explained.
When compared to similar bills, such as Sen. Bert Stedman’s SB 21, SB 26 would call for a higher rate of POMV draw, at 5.25 percent rather than a cap of 4.5 percent. The proportion of that going into dividend payments would also be considerably lower, at 20 percent rather than Stedman’s 50 percent. Drawing $2.5B from the ERA in all, this would allot $693M to the dividend for FY18, with the other $1.8B going to fund government expenses.
This would still ensure a $1,000 dividend for state residents, while bringing down the state deficit to $819M, to be covered by other revenue sources and cuts. Under Stedman’s proposal, the individual dividend would be kept at $1,585, with $1.6B to make up. Another comparable bill, SB 70, would make the allotment a 25-75 split between dividends and government expenditure, at a 5.25-percent draw.
Members of the seven-person standing committee debated at length the wisdom of the proposed bill. Sen. Natasha von Imhof (R-Anchorage) felt the 5.25-percent draw rate would be excessive.
“I understand the reasons for it but I believe it’s on the high side,” she commented, suggesting a 4.75-percent rate more in line with recommendations by Alaska Permanent Fund Corporation Trustees for protecting the fund’s principal at a five-percent level.
An outspoken proponent of further cuts and caps to the operational budget, Sen. Mike Dunleavy (R-Wasilla) was reluctantly acceptant of the bill. He stated that the ERA has remained separated from government appropriation since its inception.
“That decades-old understanding ended this year,” he commented. “I don’t think these statutes are going to protect the Permanent Fund. The only way you’re going to protect this fund is if you constitutionalize it.”
Hoffbeck opined that that process would be too lengthy, given the state of Alaska’s current budget reserves. Those will be exhausted at the current rate after the coming year. Time notwithstanding, he thought the issue would also be contentious to put before voters.
“We believe the decision needs to be made now,” he advised.
Committee co-chair Sen. MacKinnon (R-Eagle River) agreed that time was of the essence, and that the decision would have to fall upon themselves.
“This year it will be the sixth year to draw from our savings,” she noted. “And we’ve lost the opportunity to let those savings generate revenue that could have benefitted Alaska. … We could wait but there is a cost to waiting, and we have been waiting for five years.”
While noting that her constituents have been adamant for further reductions in government rather than reductions to dividends or additional taxes, MacKinnon pointed out Alaska’s geographic diversity made that a challenge.
She cited an estimate that one in every three dollars spent by local governments has come from the State of Alaska, and that cuts would merely be passed on to municipalities.
“Some people across our state believe they don’t need these services. They may forget that they travel on roads that cost a large amount of money to clear and maintain. We travel on airports that are maintained with some level of 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,” she said. “If we were just one individual we could probably cut more.”
MacKinnon added that 26 percent of reoccurring expenses has been cut from operating budget over the past several years, or 44 percent when including capital cuts.
Sen. Lyman Hoffman (D-Bethel) echoed his co-chair: “We are the elected officials. This is a very difficult vote, but it is part of a fiscal solution – probably the biggest piece of that solution,” he said. “Inaction is not a solution, is not an option. We need to take the next step… Unless we do so, we’re not only putting the dividend but also the future of Alaska at risk.”
Sen. Peter Micciche (R-Soldotna) agreed the choice before their committee was not an easy one, but was important. Speaking with constituents in 32 different public meetings, he said about 60 percent had been in favor of using part of the Permanent Fund earnings until the state got through its fiscal troubles. Of the different proposals before the session, income tax was the least favored among them. Their biggest complaint, he said, was the lack of State Troopers on hand to deal with a growing opioid crisis, due to agency-related cutbacks.
“We’ve worked hard to streamline our government,” Micciche said, while still be able to provide public services. “These are basic, constitutionally-required services,” he added.
With no further objections, the committee consented to SB 26 unanimously. It was to head from there to the Rules Committee, with a chance at reaching the Senate floor for further debate.
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