Members of the Legislative Finance Division reinforced Thursday, April 25, that large Permanent Fund dividends (PFDs) are unsustainable without deep cuts or new taxes. With no political appetite for either, Senate Finance debate on the PFD was tense.
Legislative Finance Director David Teal reviewed his Tuesday presentation showing that the House budget and the substantially-similar Senate Finance committee substitute are more sustainable than Gov. Mike Dunleavy’s plan.
“It shows deficits as high as $450 million during the next six years, and that’s under the assumption that the oil and gas property tax is retained by the State,” Teal said of Dunleavy’s plan during Thursday’s hearing.
Dunleavy is seeking to repeal over $400 million of petroleum property taxes that go to municipal governments, moving that money into the State treasury.
“Without that revenue, the plan is not sustainable,” Teal declared.
Dunleavy and the Office of Management and Budget (OMB) have claimed that failure to adopt his policies will result in what Teal called a “doomsday scenario.”
But, Teal reiterated, “There is nothing proposed that looks like this scenario. It isn’t really relevant to the discussion, except in its implication that a budget that doesn’t incorporate the governor’s cuts was not viable.”
To the contrary, the House plan results in no deficits because it uses the surplus of the percent-of-market-value (POMV) draw from the Permanent Fund Earnings Reserve Account (ERA) to pay PFDs, after spending on government services has been determined.
Teal said the result in the Senate Finance CS is roughly a $1,200 PFD.
“If you want to pay a higher dividend than that, you need additional cuts or additional revenue or draws from reserves,” he told committee members. ”It’s just math; this is not policy development.”
“I think what’s painfully obvious is how easy it would be if it were just a math problem,” countered Sen. Peter Micicche (R-Soldotna). “It’s not. Math is easy. The problem is the 735,000 others out there that some of them think something differently. That’s why this is such a painful decision on which way to go.”
“The public seems to feel differently about some of these considerations, so it turns it from a very simple solution to a very difficult one,” Micciche continued. “I think if we don’t talk about that other special interest group that expects a full dividend — I think we have to consider both sides.”
“Which public?” Senate Finance Co-chair Natasha von Imhof (R-Anchorage) asked Micciche. She continued,
The public is all over the map. There’s different groups of the public that feel different things. There’s 60 legislators here that probably have 60 different opinions on how we move in the next two weeks, three weeks. I’ve been stating for the last three months the words ‘rational, reasonable, balanced, and long-term sustainable,’ and I will continue to advocate for that. I believe there’s a good portion of the public that believes in that, as well.
I am here in Juneau a fourth generation Alaska[n]. I hope to have four more generations times four after me that we’re still talking about the Permanent Fund, that we still have an education system, we still are safe in our communities, and that requires decisions that we make today are going to have long-term impacts. By raiding the Permanent Fund, and by taking extra draws from the Earnings Reserve Account, just so we can pay a full dividend that the statute was made 30 years ago, 40 years ago, that’s not applicable today, is fiscal insanity and irrational and irresponsible. I will continue to advocate for a balanced and reasonable budget that makes sense now and makes sense for future generations. I think there’s a good solid chunk of the public that agrees with me on that.
Constitutional Amendment or Revised Statute?
“There’s a lot of laws on the books that the people of Alaska, many people, would think are insane or irrational, and there’s a way that we deal with that. We come together as a legislature, we propose legislation to change, and we debate, and then we vote it up or down,” responded Sen. Bill Wielechowski (D-Anchorage).
Until the legislature changes the PFD statute, Wielechowski said, “I think we should follow that formula.”
“I also agree that the statute is way too high for us to consider further, but I also believe that it needs to be changed. We need to decide, as a State, the split,” said Sen. Lyman Hoffman (D-Bethel), referring to the percentages of the POMV that go to government services and the PFD. “If we do not resolve the split long-term, it’s going to be a political football in each statewide election and in all of our elections. That issue is going to suck the oxygen out of the air and continue to be debated for decades to come.”
Like Dunleavy, Hoffman advocated for a constitutional amendment enshrining the PFD, though Hoffman would not preserve the existing formula, as Dunleavy would.
“We should not be afraid of the vote of the people,” Hoffman said. “This last gubernatorial election pointed out that the biggest point that is in front of the people’s minds is the dividend.”
“I think this has to be decided by the people,” Wielechowski agreed. “I think it has to be decided by a vote whether to put it in the constitution or not.”
“Before that happens, there would need to be a very comprehensive road show across the state of Alaska to show the potential implications of what that might cost future generations of Alaskans,” warned Sen. Click Bishop (R-Fairbanks). “If you implement something like that, you would need to model that seven different ways from Sunday. Because what you’re doing is potentially creating the biggest defined benefit plan in the state’s history.”
After listening to the lengthy PFD debate, Senate Finance Co-chair Bert Stedman (R-Sitka) concluded the committee needs to revisit SB 103, a bill that would evenly divide the POMV between government and PFDs.
“Clearly, action needs to be taken. Kicking the can down the road for several more years is not going to work,” said Stedman. “This is the tail wagging the dog. We need to come to a solution that’s supported by the public and frankly, works to keep the budget in balance at the State level.”
Sen. Donny Olson (D-Golovin) said that if a bill is going be passed, it has to happen this year. Next year is an election year, and such a politically-charged item won’t make it through the House, he advised.
There are only 20 days left in the session before the legislature would need to vote for a ten-day extension, according to Article II, section 8 of the Alaska Constitution.
Model Confirms Higher Inflation Will Erode Savings
On Tuesday, Teal showed that a 50/50 split, like that proposed in SB 103, results in PFDs of $2,300 to $2,500, but also structural deficits of about $900 million. That drains the Constitutional Budget Reserve (CBR) savings account and causes unplanned draws from the ERA, eroding the value of the Permanent Fund.
However, a 75/25 split generates more manageable deficits of $200 million or less. PFDs would be roughly equivalent to the current House plan.
Micciche warned on Tuesday that using Dunleavy’s 1.5-percent budget growth rate would result in consistent future cuts because the budget would not keep up with inflation.
“We know that no growth, or even negative growth, can occur in the short run. We’re in that stage now,” Teal asserted Thursday.
Teal pointed to a period from FY 1986 through FY 2004 that the budget did not keep pace with inflation. Teal acknowledged that it was “not a great time for State employees,” who went without raises for five years.
Yet, Teal said, “Flat budgets happened in the past, and we survived. Perhaps more to the point, flat budgets happened without an effective spending limit.”
Dunleavy has insisted on a constitutional spending limit. Otherwise, OMB claims, government will grow beyond the rate of inflation, at 3-4 percent.
“History doesn’t really support that claim. We’ve got a 20-year history of when revenue is constrained, expenditures are constrained by that revenue,” Teal said.
“It was the revenues that constrained expenditures,” he emphasized, not a spending limit.
Teal did note that after that period of failing to match inflation, there was an “isostatic rebound” of spending where the budget responded to pent up demand.
“The issue is that inflation strangles the spending power in the long run,” he admitted.
Legislative Finance modeled a variety of scenarios committee members requested. A $250 million capital budget, as opposed to Dunleavy’s $96 million, seemed to make no appreciable difference.
But when inflation was changed to 2.25 percent at Micciche’s request, the CBR eroded at a rate of $155 million per year, even in the 75/25 split
“That’s my point,” said Micciche. “I wonder how long that’s sustainable.”
“With a higher inflation rate, and when you have a dividend floor of 25 percent necessarily paid out, inflation begins to eat more and more of State services each year, while the dividend is, in essence, held harmless,” von Imhof agreed. “It requires more reductions, pretty much what Senator Micciche was saying. This is going to be particularly difficult with health care, which grows faster and higher than the rate of inflation, and negotiated contracts that have a combined with COLA [Cost of Living Adjustment], steps, health care benefits, and salary adjustments, that will exceed it.”
“If we keep some [expenses] at a steady level, such as the dividend here at 25 percent, both the dividend, health care, and a few others will crowd out almost everything else over time,” she concluded.
In the model, without new revenue, reserves are only stable under 2.25-percent budget growth when the capital budget is limited to OMB’s plan of $100 million per year, an amount that will add to the State’s $9 billion backlog of deferred maintenance.
On Paper, Eliminating Per-Barrel Credits Balances Budgets and Pays Bigger PFDs
Hoffman requested that Legislative Finance model a $1,600 PFD for the next four years, to match 2018, then increasing to a 50/50 split.
Even with OMB’s smaller capital budget, that formula would drain the CBR and erode the value of the Permanent Fund to compensate for deficits of more than $1 billion.
When Hoffman complained that the model used the higher inflation rate of 2.25 percent, Fiscal Analyst Alexei Painter showed Hoffman the impact with a 1.5-percent rate of inflation. The outcome was the same.
Hoffman explained his reasoning after seeing the results, saying it gives the legislature time to come up with a better plan in the next few years.
“Some may consider that kicking the can down the road,” he said, but, “The deficit that we’re facing today, at $1.6 billion, is an insurmountable one to try to resolve in one year.”
von Imhof rejected that number, which is the result of paying a $3,000 PFD based on the statutory formula, as Dunleavy proposed.
“We didn’t have a $1.6 billion deficit. That was contrived. That’s not what we have. We don’t have a fiscal crisis,” she argued. “With the Senate and the House plan, we actually have about $700 million in surplus. We have money. We just have to figure out what our priority is and where we’re going to put it. More in a capital budget? More to the dividend? More towards maybe paying the CBR back?”
“We’re not in a crisis. We’re fine,” von Imhof insisted. “We just have a priority crisis. Whether a $1,600 dividend is fiscally prudent or not, it will require, eventually, significant draws on the CBR. I have issues with paying taxes to pay for a dividend.”
“I’m sure we have at least one opinion for every committee member, plus a few extras laying around,” a chuckling Stedman interjected, trying to cool the debate.
Hoffman’s $1,600 starting point only works long-term with a step down to 75/25 in four years.
In fact, the only 50/50 split scenario that works is repeal of the per-barrel oil tax credit. Painter said it would generate “somewhere between $1 billion and $1.2 billion in additional revenue.”
That per-barrel credit repeal, in Wielechowski’s SB 14, is the only revenue measure that Senate Finance members asked to be modeled.
“In this scenario, the budget is balanced,” Painter said.
The State would have a larger capital budget, the CBR would grow, the ERA would be stable, and PFDs would be $2,300 to $2,500, even with 2.25-percent growth.
“The numbers speak for themselves,” Wielechowski said Thursday.
“Regardless of what personal opinion is or political opinion is on our tax structure, when you change one component, it has impacts on others,” Stedman cautioned. “By just repealing the per-barrel slider, there most likely would have to be adjustments to keep things in balance. There’s always behavioral reactions one way or the other any time we make an adjustment. It’s a complex issue, but in isolation, we can measure each individual component.”
“On one end is Senator Wielechowski’s suggestion that would dramatically change future revenue. On the other end is just reducing the dividend until it fits,” Micciche framed the debate. “They both have very significant impacts and unintended consequences.”
Before the committee adjourned, they looked at one final scenario Stedman requested, showing the Senate Finance CS with OMB’s austere capital budget and a full statutory PFD. The result was deficits of up to $1.7 billion.
“I thought it’d be good for the committee to see the full impact of a $3,000 dividend,” Stedman told members. “We have to make some changes. Something has to give. We’ve got to get back in balance. If we kept the statutory dividend for the next couple years- beyond that, even next year’s going to be tough- it’s going to become unbearable, and we’re going to be eroding our Permanent Fund and the value of the Fund for future generations of Alaskans without significant budgetary changes.”
Senate Finance begins consideration of budget amendments Friday. Stedman said he expects at least one PFD amendment.
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