Senate Majority unveils plan including spending cap, big cuts and Permanent Fund spending to fix the budget

The leaders of the Alaska Senate have unveiled a proposal to fill Alaska’s $2.7 billion budget gap with the earnings of the Alaska Permanent Fund and extensive cuts to the state’s four largest agencies. Those are education, the University of Alaska, health and social services, and transportation. The proposal also includes a cap on future spending.

Senate Bill 70 was introduced at Friday’s Senate floor session, following a joint session of the Alaska Legislature that featured an address by U.S. Sen. Dan Sullivan, R-Alaska.

The bill includes the Permanent Fund spending, spending cap and new formula for the Permanent Fund Dividend. Budget cuts are included in a separate bill.

In a press conference Friday morning, Senate President Pete Kelly, R-Fairbanks, said the “solution to the state’s fiscal problem, it’s not easy, but it is simple.”

The Senate Majority’s proposal differs from a solution proposed in the House. House Bill 115, supported by the coalition House Majority, includes a 1.5 percent income tax as well as spending from the Permanent Fund’s investment earnings.

“At this time, we are not envisioning any taxes,” Kelly said of the Senate’s strategy.

Differences from the House

The House Majority has favored fewer cuts than the Senate; members of the House have pointed to the fact that the Legislature has cut the flexible portion of the budget by some 44 percent since fiscal year 2013, when undesignated general fund spending reached $7.8 billion. In fiscal year 2017 (the current fiscal year), that spending is just $4.4 billion.

Despite those cuts, the collapse in oil and gas prices has left Alaska with an enormous deficit. According to estimates from the Alaska Department of Revenue, the state is expected to collect only $1.7 billion from taxes of all kinds this year, and the state’s principal savings account, the Constitutional Budget Reserve, will be empty as soon as 2019.

Neither the Senate Majority’s proposal nor the House Majority’s proposal erase the state deficit in one year. Instead, they fix most of it and buy time for other parts of a permanent fix.

The Senate Majority’s plan calls for $300 million in budget cuts this year, then $450 million more over the next two years combined.

“The point is, over a three-year time, we’re looking at $750 million in cuts,” Kelly said.

Members of the Senate Finance Committee said they’re looking at taking 5 percent from education, the university, transportation and health this year.

“The phrase that I’ve been using … is that we’re asking people to cut a nickel,” said Sen. Lyman Hoffman, D-Bethel and co-chairman of the Senate Finance Committee.

That stands differs from the proposal offered by the House Majority, whose members have not suggested significant additional cuts to state services but are suggesting cuts to the state’s subsidy of oil and gas drilling. The Senate opposes those cuts.

Changes to the dividend

Overall, members of the Senate Majority said their goal is to avoid impacts on the private sector of the state’s economy.

“We think that would be counterproductive,” Kelly said.

Nevertheless, the Senate Majority’s proposal can’t avoid all of those impacts. Included in its provisions is a cap on the Permanent Fund Dividend. The dividend would stay at $1,000 for the first three years of the plan, then be calculated under a new formula that would see its value rise over time.

While the principal of the Alaska Permanent Fund remains constitutionally protected, the revenue earned from investing that principal is not. It’s kept in the “earnings reserve,” which can be spent with a simple majority vote of the Legislature.

The earnings reserve is the source of dividend payouts, and under both the Senate and House plans, it’s where a portion of government spending would come from.

The Senate Majority’s plan calls for spending 5.25 percent of an average of the earnings reserve’s value. The House Majority’s plan calls for spending 4.75 percent of that average.

The House would spend a third of that money on dividends; the Senate would spend a quarter of its money on dividends.

Gov. Bill Walker has also proposed a draw from the Permanent Fund’s earnings, but his idea is not particularly different from the Senate or House plan, and it does not have as much Legislative support.

Tightening the spending cap

The Senate plan includes a provision to reduce the Permanent Fund draw if oil prices rise, and it includes a $4.1 billion cap on future undesignated general fund spending.

That cap would rise with inflation, but it wouldn’t be adjusted for a rising state population.

It also wouldn’t have much power.

Alaska’s constitution already has a spending cap, albeit one so high that it’s largely irrelevant, and a law can’t trump the constitution. Furthermore, the Legislature can’t bind a future Legislature by statute. A spending cap passed by statute would have as much authority as the law calling for a 90-day Legislative session.

Despite those obstacles, Kelly said a spending cap passed by the Legislature this year would act as a test for a constitutional amendment written along the same lines.

“It’s like a test-drive for an automobile that you’re going to buy,” he said.

If the drive is a success, it would end up on the state’s general election ballot in 2018 as a proposed constitutional amendment.

The Senate’s plan has been referred to the Senate Finance Committee for vetting and discussion.

Kelly and other senators said lawmakers in the House and Senate might disagree about the precise way to do it, but they agree that the state’s deficit needs to be fixed this year.

If nothing happens, “we are going to be facing a cliff that is so massive that the people of Alaska can’t imagine (it),” Hoffman said.

 


 

Contact reporter James Brooks at james.k.brooks@juneauempire.com or call 419-7732.

 


 

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