Legislature looks at size of PFDs and new revenues

The state is not going to fill its billion-dollar fiscal pothole with additional deep budget cuts, said two veteran legislative finance committee members.

The hole is too deep, and years of cuts to the operating and capital budgets already have reduced state spending on public services to a 15-year low, on a per-capita basis adjusted for inflation, according to numbers assembled by one of the co-chairs of the Senate Finance Committee.

When dealing with the budget, legislators have had to determine if the state has a spending problem or a revenue problem, said Sitka Sen. Bert Stedman, co-chair of Senate Finance.

"Several years ago, we had both (problems)," Stedman said Monday. After years of cuts to services and programs the issue now is on the revenue side, said the senator, starting his 19th year as a legislator and in his ninth year as co-chair of Senate Finance.

"Fast forward to today, and the problem isn't on the expense side," said Stedman, who also represents Wrangell.

A chart prepared by the senator's office shows that only the Department of Corrections this year is at the high point in inflation-adjusted spending of the past 16 years - all other departments, the Legislature, judicial branch and governor's office are down from their high years, many significantly.

Much of the problem on the revenue side is falling oil revenues, and no other taxes to make up the difference.

In that context, lawmakers this session will need to look at revenues and decide how much of a Permanent Fund dividend the state can afford for this fall and how to pay for it without overdrawing the Permanent Fund earnings reserve, said Fairbanks Rep. Adam Wool, in his third year on the House Finance Committee and seventh year in the Legislature.

Gov. Mike Dunleavy's fiscal plan shows the state averaging an annual budget deficit of more than $1 billion after this year, assuming a Permanent Fund dividend as proposed by the governor of double the average of the past five years.

The governor proposes that lawmakers withdraw more than $3 billion additional from the Permanent Fund earnings reserve this year to pay an extra dividend in the spring and a larger dividend in the fall. Doing that, however, would exceed a state law that limits annual withdrawals to no more than the fund is projected to earn on average each year.

Taking an extra $3 billion from the fund would cost the state a couple hundred million dollars a year in lost investment earnings from a smaller Permanent Fund.

Overdrawing the account not only jeopardizes future dividends but also future public services, Wool said.

Adhering to the withdrawal limit on fund earnings "is your spending cap," Stedman said.

The annual transfer from the fund's earnings account covered about 60% of state services and the dividends last year. If Alaskans want a dividend in the years ahead, the Legislature needs to set the PFD at an affordable amount, Wool said.

"People do not want to overdraw the fund," he said. "Once you overdraw once," it becomes easier the next time and the next time, and pretty soon the fund - and public services and dividends - are in jeopardy.

Under the law, Permanent Fund earnings are the same as oil taxes, motor fuel taxes, corporate taxes - they all go into the state general fund for appropriation.

The Legislature needs to figure out "that sharing relationship between dividends and our core services," Stedman said. After that, lawmakers can look at taxes. "There are no sacred cows," he said, and that includes an income tax, sales tax or changes to oil taxes.

As Alaska North Slope oil production is down more than 75% from its peak in 1988, the state has relied on savings and, in recent years, Permanent Fund earnings to pay the bills. Lawmakers and previous governors have talked of instituting an income or sales tax, but not done so.

Fund earnings are providing about three or four times as much money for the state budget as oil revenues, though higher oil prices of the past month, if they hold for a full year, could bring in an additional $250 million or $300 million to the state treasury - that's about 5% or 6% of the budget if the PFD were $500.

In addition to deciding on this year's PFD, lawmakers have to find long-term answers to the state's revenue needs, Wool said. "Even the governor himself has said we need $1.2 billion in revenue going forward," Wool said of Dunleavy's budget plan that acknowledges a steep deficit in the fiscal year that starts July 1, 2022.

Other than saying the state needs to find "other revenue sources," the governor has proposed no taxes or other substantial new revenues - except a statewide lottery. He wants legislators to approve a constitutional amendment for the 2022 ballot that would prohibit new taxes without voter approval.

The state is running out of time, Wool said, as it could take at least 18 months to set up a state sales or income tax and start collecting money.

"Everyone kind of knows" the state needs to institute a sales tax or an income tax, "but they're afraid to take the leap," he said.


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