Wrangell’s district representative for the State Legislature teleconferenced in late last week to update constituents on what’s going on in Juneau.
Rep. Dan Ortiz (I-District 36) called in to Legislative Information Office locations in Ketchikan and Wrangell to explain ongoing bills and field questions on March 23. Likely the biggest issue on Alaska’s collective mind is its budget deficit, which by various measures is set to drain billions from the state’s savings this year. With spending left as is, the Legislative Finance Division projects the deficit would cost the state $2,707,000,000 during the 2018 fiscal year.
With revenues from petroleum production and mineral extraction falling substantially in recent years, Alaska has been largely withdrawing money from the Constitutional Budget Reserve to cover the difference in its annual spending. Valued at $10.1B for FY15, subsequent withdrawals have left the fund at a mere $4.7B as of the end of February. Left unchecked, the state only has a limited amount of time before the account is completely exhausted.
Ortiz pointed out the Legislature has been trying to check its spending in recent years, cutting the overall budget by 44 percent, including agency cuts of 26 percent.
“There’s just no way that we can solve this fiscal issue without some budget cuts being part of the process, and some significant budget cuts,” he noted.
But with cuts come reduced service, and reductions to the Marine Highway System, Department of Fish and Game, and State Troopers were among those being felt most by residents in Southeast. Further reductions to education, revenue sharing and capital projects would begin to shift previously state-shouldered costs to municipalities.
Budget bills are being approved by both chambers of the Legislature, with differing views on where to go from here. Passed earlier this month, Senate Bill 26 would restructure the Permanent Fund to supply the state with operating cash. Specifically the way the Earnings Reserve Account, from which annual dividends are paid out, is funded would be tied to a percent of market value of the Fund principal. A POMV rate of 5.25-percent annual withdrawal from the Fund would be put in place, as would an overall spending cap on state operations.
Dividends would be capped at $1,000 for the next three years, but the overall bill would still leave a deficit of about $819M to overcome with other sources. The bill is currently in the House Finance Committee awaiting consideration.
Still in committee on the House side and likely to face a floor vote early in April, HB 115 also offers a restructure of the Permanent Fund based on a POMV approach similar to the Senate’s. What sets it drastically apart is the institution of an income tax, based on 15 percent of a person’s federal income liability.
The state hasn’t had an income tax since 1980, but Ortiz argued now was the time to look at its reinstatement. “We’re never going to get to fiscal balance just by budget cuts alone. You just can’t do it and live up to constitutional responsibilities,” he told constituents.
The House bill will have its cuts too, reducing spending in FY18 from FY17 by $82.5M. With the cuts and additional revenue added from an income tax – about $655M – and two-thirds of annual withdrawals from the ERA, the deficit would be reduced more significantly than with SB 26, Ortiz said.
“It’s at a high cost. The high cost is the potential of having to pay an income tax,” he added.
Testimony on the bill was scheduled for Wednesday and Thursday this week, with a final decision expected Friday. Ortiz said representatives would need to weigh positives of closing the fiscal gap against the negatives.
He noted the Senate’s solution also could be looking at a reduction in the Base Student Allocation to municipal schools, by about five percent. This would translate into $1.4M less to Ketchikan, and $198,000 less to Wrangell each year, he estimated.
“Which in essence would be passing off the responsibility of funding schools from the state level down to the local level,” Ortiz explained. This could mean either property tax increases or more condensed classroom environments. “Those decisions would be put into the hands of the local governing bodies.”
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