Unhappy with Governor Michael J. Dunleavy’s chosen path of a spending cap via constitutional amendment (Senate Joint Resolution 6), Senate Finance Co-Chair Natasha von Imhof (R-Anchorage) has taken it upon herself to write her own plan.

Senate Bill 104, introduced earlier this week and sponsored by the Senate Finance Committee, seeks to replace an existing statutory spending cap put in place in 1986 (which mirrored the cap adopted into Article IX, Section 16 of the Alaska State Constitution in 1982). That antiquated limit (starting in 1986) disallowed appropriations exceeding $2.5 billion in a single year, plus five percent growth, and allowing annual adjustments for inflation and population changes.

The wildly-high initial base rate, in application, has rendered any actual capping of spending effectively moot. The statutory cap enacted in 1986 would permit the legislature to appropriate $10 billion this year alone – highlighting the obvious and widening disconnect between the constitutional/statutory limits and the actual revenue available for appropriations.

Dunleavy has advocated replacing the existing cap with a constitutional amendment establishing a new one. SJR6 would limit State spending to the average of the budgets passed in the previous three-year period, allowing for adjustments to accommodate inflation and population growth. His proposal caps any growth at two percent overall and sides with whichever amount winds up less. It also repeals and reenacts the Constitutional Budget Reserve (CBR), which serves as a de facto savings account. Largely because of slumping oil prices and the resultant state deficits left in their wake, the CBR has dwindled to $1.7 billion – down from over $10 billion in 2015.

SJR6 would rename the CBR the Savings Reserve Fund and remove the provision allowing the legislature – by three-quarters vote – to use portions of it to fund government services. Currently, leftover funds from capital projects that don’t end up getting used are “swept” into the CBR at the end of a fiscal year to be usable for other purposes. Under the governor’s proposal, they would automatically be shuffled wholesale to the Permanent Fund. (Deliberations over SJR6 have slowed due, in part, to concerns it is a constitutional revision, not an amendment, and would require a constitutional convention to pass.)

SB104, conversely, would set a statutory appropriations limit on all Unrestricted General Funds (UGF) with an initial base rate of $5 billion for FY2021. Growth is controlled based on the average of the last five years’ rate of inflation. Using an average, rather than SJR6’s yearly assessment of inflation, attempts to avoid single-year swings. von Imhof’s approach also excludes Designated General Fund (DGF) spending, keeping those allocations outside the cap. This is to avoid situations where funds specifically designated for a purpose would require offsetting cuts. As one example, if the university were to raise tuition, SB104 wouldn’t necessitate decreasing funds somewhere else to offset the receipts. SJR6 does not distinguish DGF from UGF spending.

The strength of SJR6 (and weakness of SB104) is that the legislature can’t override a constitutional amendment, meaning that, in times when oil prices are high and state coffers could allow more investment in infrastructure and other programs, spending is restricted. The weakness of SJR6 (not at play with SB104) is that it is a constitutional amendment, meaning the legislature can’t override the limits it creates in times when a deviation is warranted, or, it could be argued, needed.

In other words, any change to the constitution guarantees inflexibility, come boom or bust. That’s a scenario Colorado faced in 2005, when a budget shortfall conflicted with a constitutional requirement (similar to another proposed constitutional amendment Dunleavy is pushing) requiring money that would otherwise be used to plug the gap instead be reimbursed to taxpayers.

“When Colorado experienced significant revenue shortfalls… there was no savings account to provide a buffer and a pretty tough economic recession followed,” von Imhof told her colleagues during the first hearing on SB104. “As a result, voters approved a legislative referendum in 2005 to forego the mandatory tax refunds and instead kept surpluses in a savings account to provide a fiscal buffer when revenues shrink. Alaska, again, has the [Constitutional Budget Reserve] CBR. We want to keep it. We need to fund it during years when we have excess revenue so it can be there when we need it.”

Senate Finance Co-Chair Bert Stedman (R-Sitka) warned of the vulnerabilities spending caps can create by reflecting on actions taken in 2007 and 2008 – an abrupt period of economic decline now known as the Great Recession.

The only tool the legislature had to shield the State from the global economic crisis was to use the capital budget to drive the economy, Stedman recollected.

“We put capital projects out all across the state. And we spent quite a bit of time at this table making sure it wasn’t concentrated in one area or the other, so we could ride through that recession with, basically, the wealth tool that the State has,” Stedman said. “So, when we look back at that, and we look back at the recession data, it’s very difficult to even see that Alaska was impacted at all during the Great Recession. There’s a lot of people who like to point to the larger capital budget, but they forget or don’t understand that a lot of that was a policy to keep us from driving into a recession.”

He wondered aloud what deleterious effects SB104 might have on the ability to confront a similar crisis in the future.

“I guess the collective decision of the 60 legislators will be to decide do we increase during economic lean times and, if so, how much?” von Imhof replied. “If we’re okay with a potential free fall of revenue and having to contract our expenditures and go through the pain, well, that’s a decision that we should make. But, a spending cap will give us a tool to, as a guideline, as we move forward, and then look back at historical spending and then give us a guideline as we move forward to decide whether we want to go above and beyond it and by how much and by whatever kind of vote we want to do to do that.”

von Imhof declared her intention to aim for a $150 million capital budget, which would allow for $90 million in matching federal funds and limited cash for other deferred maintenance. Stedman wasn’t sure that would be enough.

“It would appear that that would be too low and we would end up with basically running federal match capital budgets, and that doesn’t give us the ability to invest in state infrastructure outside of, basically, federal support,” he said.

“We’re still victims of investment growth versus inflation,” Sen. Peter Micciche (R-Soldotna) responded, adding that he shared some of Stedman’s concerns. “The problem is, when you get so far out of moderation, that chunk of spend above that spending cap, if you translate it to today, what we would have: we may have avoided a recession back then, but we may have caused one today. So, with some moderation on capital spend, you can sort of level out that long term effect. You can still have some stimulus but avoid the struggle we’ve been having the last four years.”

Sen. Bill Wielechowski (D-Anchorage) worried that SB104 would lock in future cuts to the Permanent Fund dividend. He asked why not exclude the PFD from the cap. von Imhof was nonplussed by the question. She answered very deliberately — and very slowly.

“The choices that we have as we move forward, is either we can take extra money from the Earnings Reserve Account, thereby depleting it – probably in about eight years or so – to pay a large Permanent Fund dividend, based on the statutory calculation today. I don’t think that’s wise for the future generations of Alaskans. Our second option, then, is to spend what we have,” she said, pointing to a chart (Slide 5) tracking estimated UGF revenue plus the Permanent Fund dividend. “We will have to make some tough choices. We can either cut teachers or troopers or health care professionals and pay a $3000 dividend to everybody or we try to find a balance somewhere in the middle where we pay a reasonable dividend that provides a distribution of wealth over time as well as a reasonably sized core government services.”

Sen. Mike Shower (R-Wasilla) said he was concerned there wasn’t sufficient public trust to opt for a statutory change – which a legislature can circumvent – versus a constitutional amendment, which they can’t. Sen. David Wilson (R-Wasilla) asked why not simply mirror SJR6 in statute and set it to sunset in 2020, when voters could approve or reject it.

“I prefer my bill over SJR6,” von Imhof replied with a heavy connotation of shade thrown the governor’s way. “I think that the bill that I have here makes more sense, is more rational. So, no. I don’t want to.”

“There are things I like about SJR6 and there are things I like about this bill,” Micciche told his colleagues. “This trend is obviously the right trend. The SJR6 trend is unrealistic…. You can make believe inflation is not a real thing, and you will find that it is. There’s no way to beat that force.”

“It is different than the [proposals] that have been before the committee before, so maybe we have something here that will work,” Stedman agreed. “It’d be nice.”

“I sincerely want to try to deliver a spending cap for [the governor],” von Imhof concluded. “We have 60 legislators that all want to weigh in. A statute is a starting place by which we can begin that discussion and just see where it will take us. There is a sincere effort to try to provide the governor what he’s looking for.”

However, evidence suggests Dunleavy disagrees. In a press conference the day before, he emphasized his package of constitutional amendments and lamented the resistance they’ve faced in the legislature (two are in Senate Judiciary, while a third is in Senate Finance).

“If we’re not going to have any discussions on constitutional amendments, allowing the people of Alaska to vote… it makes it really tough to come up with a deal,” he said, prominently displaying a red pen in his jacket’s breast pocket – a nod to his line item veto power. “In the end, the constitutional amendments are the permanent fix…. If we’re not even willing to do an advisory vote, than we’re really not serious about engaging the people of Alaska.”

Senate Finance heard and held the bill, and have momentarily abandoned it as they move on to take public testimony on the operating budget.

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