Legislative Finance Director David Teal told Senate Finance Tuesday, April 23, that the budget passed by the House does a better job meeting Gov. Mike Dunleavy’s budget principles than Dunleavy’s own budget.  The “one glaring exception” is the Permanent Fund dividend (PFD).

Neither the House budget nor the Senate Finance committee substitute introduced on Monday includes a PFD.

Members of the House majority say the PFD has risen beyond a line item in the budget and should be considered separately.  They plan on using- and almost certainly amending- Dunleavy’s PFD bills to have that discussion.

House Finance Co-chair Neal Foster (D-Nome) clearly framed the PFD debate in a press conference April 12.

“There’s a lot of differing opinions on how we move forward on that.  Some folks are saying that we should pay it based on the surplus money that’s leftover in the budget that we have right now,” Foster said.  “Some other folks feel that we should do at least what we did last year, which was $1,600.  And some folks are looking at a split.  The Senate’s version right now would get about a $2,300 dividend.”

The Senate bill Foster referenced is SB 103, a bill evenly dividing the annual percent-of-market-value (POMV) draw from the Permanent Fund Earnings Reserve Account (ERA) between government services and the PFD.  The POMV is approximately $3 billion.

But that plan would leave a deficit that requires further cuts, a politically-challenging draw from the Constitutional Budget Reserve (CBR) savings account, or an unstructured draw from the ERA.

Foster estimated that paying PFDs from the remainder of the POMV in the House bill would result in a $1,284 PFD.  That would leave no deficit.

“You’ll see that dividends are substantially lower than under the governor’s plan.  That’s because the underlying assumption of this plan is that you first develop a budget that meets the needs of the citizens, in the opinion of the House members who drafted it,” Teal explained in a hearing.  “Instead of the drastic cuts to education, Medicaid, transportation, the cuts are reduced, and then the amount of the [POMV] surplus… goes to dividends.”

“The underlying theme of the House of Representatives budget is that government gets the first crack at the $3 billion, and anything remaining after government goes to the people,” Sen. Lyman Hoffman (D-Bethel) said.

“I’m not sure that everyone would phrase it that way, but that’s pretty accurate,” Teal responded.

“I think in this scenario, the dividend is sort of like the eighteenth agency and competes for funding with the 17 other agencies,” Senate Finance Co-chair Natasha von Imhof (R-Anchorage) said of the House budget.  “But… there’s no new taxes.  About $200 million or so in reductions.  No money from any savings accounts at all, no SBR [Statutory Budget Reserve], no CBR.” 

“All correct observations,” Teal agreed.

“Some states have an income tax, and this causes citizens to pay attention to the growth of government.  Alaska has the dividend, which kind of does the same thing,” von Imhof continued.  “Alaska is slowly morphing into the new POMV age, which I think is, of course, a good thing.  And yes, the dividend is competing with the other agencies.”

Governor’s Budget Plan Doesn’t Work Without Taking Local Tax Money

In his presentation, Teal compared Dunleavy’s plan, which would pay a $3,000 PFD at a cost of $1.9 billion, with the House budget. 

Teal said people expressed concern about his first few slides.  They were generated by the Office of Management and Budget (OMB), but that was unclear.

The first slide asks, “Where does Governor Dunleavy’s plan lead?” before answering, “Full PFDs, Balanced Budgets, and a Bright Future.”

“This is the slide that some of my constituents send me, [along] with the status quo budgeting,” Sen. Peter Micciche (R-Soldotna) complained.  “What’s wrong with this slide?  It makes perfect sense to many people that it’s just this easy.” 

“I would agree with you that it looks good,” replied Teal.

According to the slide, the ERA balance grows after Dunleavy is done paying off the balance of the 2016 PFD Gov. Bill Walker vetoed and the 2017 and 2018 PFDs the legislature reduced.

“A growing Earnings Reserve Account is a very good sign of a viable model,” Teal explained.

However, after a balanced FY 2020 budget, OMB’s ten-year plan indicates that there will be deficits from FY 2021 to FY 2026 that need to be filled from the CBR.

“I don’t see those draws on this graph,” Teal said, referring to OMB’s “Bright Future” slide.  “The ten-year plan and the governor’s graphic representation should be consistent.”

Teal acknowledged that the 30-year timeframe of OMB’s graph distorts the data.  For an accurate representation of Dunleavy’s plan, Legislative Finance used their own model. 

Dunleavy’s proposed constitutional amendment capping spending assumes two-percent budget growth, but Teal said, “If you plug in two percent, you don’t get the results.” 

“We find that the scenario matches the governor’s numbers better when we use 1.5 percent,” Teal told Senate Finance.  “We don’t know exactly what assumptions he used; all we have is a graph.” 

The same growth rate was used for all budget scenarios to produce equitable results.

Though there are deficits through FY 2026, Dunleavy’s plan leaves a healthy CBR.  That is largely due to his proposals to sweep $1.4 billion of designated general funds into the account, including the Power Cost Equalization (PCE) Endowment Fund, the Community Assistance Fund (formerly Revenue Sharing), and the Higher Education Fund.

Senate Finance Co-chair Bert Stedman (R-Sitka) noted that Dunleavy’s plan is also dependent upon the State taking the petroleum property tax from local governments and not reimbursing municipalities for any portion of school construction and repair.

“All of those things,” Teal agreed.  “The governor’s plan was not merely a spending plan, but a revenue plan, as well.”

“Paying out those extra dividends removes money from the Earnings Reserve Account and therefore, you have less money to earn money on in the future so that your earnings does not quite keep pace with inflation, and the Permanent Fund has some loss of real value.  It’s not huge, but we’re not able to keep pace with inflation.  Of course, these high dividends also come at the cost of large cuts to services in FY ’20,” Teal said.  “Paying higher dividends, or putting dividends as a priority in developing the budget, causes him [Dunleavy] to take a number of reductions in order to balance the budget without additional revenue, with no new taxes.  It does, however, include the $429 million of oil and gas property taxes.”

Teal said the ERA eventually recovers and stabilizes after payment of the 2016-2018 PFDs.

However, none of the bills to support Dunleavy’s plan are moving in the legislature.  The House budget and the Senate Finance CS do not include the sweep of designated funds or the State seizure of local fisheries taxes.

“Is the governor’s plan practical, not in the sense of does it work- the numbers show it works- but in the sense that it relies on revenue that may not materialize?  That’s because the legislature shows no signs of support,” Teal said.  “If those things don’t happen, then the governor’s scenario looks very different.” 

Without the supporting bills, structural deficits of $600 million to $900 million persist in Dunleavy’s plan.

“Those higher deficits mean that the CBR disappears in a couple of years,” Teal told committee members.  “The CBR vanishes, and the Earnings Reserve is on a downward slope.  Not a good sign of a viable scenario.  You’ll also see that the Permanent Fund does not keep pace with inflation.  That occurs because when you have deficits that you cannot fill, there’s an assumption that you draw those monies from the Earnings Reserve.”

“Dividends are the same, roughly.  Expenditures are the same, but bigger deficits cause your reserves to erode,” Teal concluded.

Teal: House Plan “Looks Nothing Like the Doomsday Scenario” Dunleavy Claimed

Dunleavy has cautioned that status quo budgeting would end PFDs in FY 2022 and drain the ERA in FY 2040.

“It is not the House plan.  It is not the Senate plan.  It is nothing that we can duplicate in our model,” Teal said of this doomsday scenario.

To the contrary, the House plan results in a healthy CBR because there are no deficits.

“It would turn into strictly an emergency account,” Teal said of the CBR.

The real value of the Permanent Fund would not quite keep pace with inflation, but it would be better than Dunleavy’s plan.

“In short, this scenario looks nothing like the doomsday scenario,” said Teal, “what the governor said would happen if you didn’t follow his plan.”

The key difference is that under the House plan, PFDs would decrease from roughly $1,200 to a low of $900 in FY 2022, then return to $1,200 by FY 2026.

“Arguably, the House scenario does a good job of meeting the governor’s criteria, with one glaring exception,” Teal said, quoting Dunleavy’s budget principles.

“Expenditures cannot exceed existing revenue.”  Well, you see that the governor’s plan, even before taking the revenue from it, had deficits.  The House plan had none, right from FY ’20 onward, never has deficits.  So the House does a better job of meeting Principle 1.

The governor said that his budget is built on core functions that impact the majority of Alaskans.  Again, the House did not take the reductions to transportation, to health care, or to education that the governor’s dividend plan required him to cut from there.  So arguably, advantage House.  There are no deficits, and the core functions are funded at a higher level under the House plan.

“Maintaining and protecting our reserves.”  Again, advantage House.  The governor has deficits and pulls from the CBR to fill those deficits throughout the early and mid -’20s.  The House plan balances the budget in ’20 and forever after.

Moving to number 5, “Sustainable, predictable, and affordable.”  Again, advantage House, particularly if the State does not keep all of the oil and gas property taxes.

Leaving you with the one glaring exception, and that’s number 4, “The budget does not take additional funds from Alaskans through taxes.”  It doesn’t do that, but it does reduce PFDs.  As Senator von Imhof said, that is the tradeoff that, not just the House, but Senate faces.  Every program, whether it’s transportation, education, or dividends, competes for the same money.  Our problem, of course, is that we don’t have enough money to satisfy every one of those needs.  As Senator von Imhof has said in the past, we’ve got a question of priorities that we need to decide.

“I hear from constituents all the time that say, ‘If you cut my dividend, that’s essentially a tax,’” countered Sen. Bill Wielechowski (D-Anchorage).

Micciche noted that while the House plan reduces PFDs, Dunleavy’s budget would require municipalities to raise local taxes to compensate for lost petroleum property taxes, fisheries taxes, and school bond debt reimbursement.

“To be fair, there’s a couple ways to frame this discussion.  The governor’s plan requires new taxes, but it’s paid locally, instead of to the State.  So for folks that own a piece of property or that live in municipalities that have to make up the difference, it requires new taxes,” Micciche said.

“To also be fair, the House budget impacts household income because of the shift from the dividend to State government,” Micciche continued.  “Both of them have those impacts.  It’s not like either one is impact-free.  For the folks that feel they’re entitled to a dividend, they’re going to be enraged by our discussion that we make it sound like there’s no impacts.  But they have to be clear that on the other side, the governor’s plan requires revenue.”

Teal said that, as they stand, the House budget and the Senate Finance CS have roughly the same amount of cuts.

“If you saw the House and Senate plans simultaneously on the screen, it would be really difficult to tell them apart,” he said.

One difference is that the House budget pays the minimum percentage of oil and gas royalties to the Permanent Fund, as the legislature has the previous few years.

The Senate Finance CS pays back that amount and includes a higher percentage of royalties from new oil fields.  The result is an additional $250-300 million for the corpus of the Permanent Fund that Stedman said will grow to over $1.3 billion in 20 years and $3 billion in 30 years.

“I’m very proud of the committee to stand up and backfill the Permanent Fund on this issue in these tight years and make sure that we’re taking care of future Alaskans,” Stedman said.

Teal Says 50/50 POMV Split Doesn’t Work, But 75/25 Does

While it is not represented in the Senate Finance CS, Teal modeled the 50/50 split in SB 103 that would result in a $2,300 PFD and leave about $1.5 billion for government services.

Teal said the result of the 50/50 split looks remarkably like Dunleavy’s plan without the seizure of petroleum property taxes and fisheries taxes.

“The bottom line here is the dividends are too high to pay from the [POMV] payout itself.  You end up either needing additional cuts or revenue in order to balance this,” he told Senate Finance.  “This one is not viable long-term, as shown by the declining Earnings Reserve balances.”

“Without any changes in revenue,” Stedman clarified.

However, when the PFD is only 25 percent of the POMV payout, the CBR and ERA are stable, while near-term deficits fall within a margin of error.

The 75/25 split was part of SB 128 in 2016.  Walker introduced the original POMV bill, but Senate Finance amended it to include the 75/25 split.  The bill passed the Senate, but died in the House Finance Committee.

“This proposal looks now almost exactly like it looked several years ago.  It works,” Teal said of the 75/25 split.

Teal is scheduled to appear before Senate Finance on Thursday.  Committee members asked him to model a variety of POMV splits at that meeting.

“Having the government take the first bite of the apple puts the dividend potentially at risk,” said Hoffman.  “We, as the State, should be listening to the people of Alaska because they are heavily dependent [on], and have been strongly supportive of, the dividend.  Whatever that dividend is, I think the legislature should decide once and for all on whatever that split is.”

“It’s important to decide what the dividend is so that the people of Alaska will know what that dividend amount is going to be and it’s not a political football that’s tossed around every election cycle.  I know that they want to have some certainty on the dividend,” he continued.  “There are people that also want to have some certainty on how much money is going to be going to the government.  Those two bookends would be met by deciding on the split.”

Stedman said the committee will consider budget amendments Friday, and he expects the split to come up.

“It will not change significantly.  There will be tweaks here and there,” Stedman said generally of the budget.

Wielechowski asked Teal to model what the various scenarios would look like if the per-barrel oil tax credit were repealed.  Wielechowski has a bill (SB 14) to do just that.

“Economists will tell you that if you tax something or you increase funding or take away funding, behaviors of consumers or corporations will change,” von Imhof warned.  “By removing the per-barrel credits, the numbers may look better, but we do not know what the behaviors will be, of the consequences of that.”

Senate Finance Members Balk at Austerity of Model Assumptions

The Legislative Finance model uses the Department of Revenue’s Spring Revenue Forecast for oil price and the Permanent Fund’s estimated investment return to gauge growth of the Fund.

“Any time we can, we will use assumptions that are produced by experts, rather than making up our own,” Teal said.

But two model assumptions frustrated committee members, the first being OMB’s use of a $100 million capital budget.

“It would leave us nothing to virtually build anything outside of federal assistance,” Stedman said of a $100 million capital budget.  “It’s below a bare-bones capital budget.  It’s pretty much just straight federal match.  We’ve done that in the past only under the most dire circumstances to deal with our budget.  It forces a compounding effect of deferred maintenance in front of us.  We have lots of history to show that.”

He said a $250 million capital budget would be more realistic.

Dunleavy’s capital budget is $96 million in unrestricted general funds (UGF).

OMB Capital Coordinator Shelly Willhoite testified before House Finance that the State has $9 billion of deferred maintenance projects.

“All these scenarios have basically a flat capital budget.  I’ve always been a proponent of ringing the bell on our deferred maintenance,” Sen. Click Bishop (R-Fairbanks) complained.  “We can’t continue with a flat capital budget.”

Bishop also said the budget scenarios do not account for a bad market year.

“Revenue is not linear,” Stedman concurred.

Micciche took issue with using Dunleavy’s 1.5-percent inflation rate as a base for the models.

“Is it painful to have 1.5 percent plugged into the growth rate in all these models for you, being nearly a full percentage point below actual likely inflation?” he asked Teal.

“I would say 1.5 percent is pretty aggressive, but I’d also say that you have to do it.  If you cannot hold the line on budget increases, you have to get additional revenue,” Teal replied.  “It is doable to go at 1.5 percent.  Long term, it’s going to be, not painful to me, but it’s going to be painful to agencies and employees who say, ‘My wages are going to have a real difficult time keeping up with inflation if budgets are restricted to a growth rate lower than inflation.’”

“Why is a growth rate below inflation important?” Micciche pressed.  “Isn’t that true that you would have to cut that difference every year in perpetuity for the years that you were below inflation?”

“That’s correct,” Teal said.

“People like to compare budgets to households, and beating inflation in your household spending is simply not possible over time.  You just would buy less and less things until you eventually could buy nothing,” Micciche said, clearly with Dunleavy in mind.  “We can talk about sort of a rhetorical under-inflation spend, but over time, that spread gets wider and wider.”  

“That’s correct.  There’s no doubt about it,” Teal agreed.

“I think it’s pretty much common knowledge that inflation erodes purchasing power, and you have to deal with it or it just eats you alive in the long run,” Stedman added.

Teal said he can increase the rate of inflation in the models, but he told the committee what they already know: “Every one of these scenarios will look worse with the higher expenditure growth.”

Micciche said Dunleavy’s budget looks fine on paper. Yet, “When you see his budget later on in years, it relies more and more on excess savings draws.  That’s covering that difference over time.”

“Every citizen that has a savings account in a bank understands inflation in their interest rate.  That’s glaringly obvious, especially to retired people,” said Stedman.

Teal said legislators have a lot of tough decisions to make.

“You can spend money on dividends, and you can spend money on government services, but you can’t spend it twice,” he said.  “You will not have a complete fix until dividends are determined.”

But, with the models countering Dunleavy’s message, Teal told Senate Finance, “You know that the scenarios other than the governor’s plan are ‘sustainable, predictable, and affordable.’”

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