Hopes for a 90-day session go by the wayside

Early last week legislative leaders had realistic hopes of adjourning on the 90th day, on Sunday, April 15, but as of Saturday it appeared there was still too much work to do.

A few more days is all, House and Senate leaders promise.

Fundamentally, there appears to be agreement on major issues and that a long, drawn-out session like happened last year will be avoided.

The differences between the House and Senate budgets will likely be worked out quickly. The operating budget is marginally up from the current year, with higher costs this year due mainly to rising health costs.

Finding money for a state capital budget is a continuing problem, however. This year’s proposed capital budget is bare bones, paying the required state match to federal transportation funds and for a few urgent state needs.

The state fiscal gap is the most serious problem confronting the Legislature and there is now consensus that some of the Permanent Fund’s ample earnings can be used this year to fund next year’s budget. The state has been running back-to-back multi-billion dollar deficits.

Significantly, there’s now agreement that the draw on the Fund’s earnings must be done in a structured way, and the plan now agreed between the House and Senate is that a percent-of-market-value draw, or POMV, of 5.25 percent can be made from the Permanent Fund’s earnings reserve account.

This is the account of accumulated earnings, totaling about $13 billion, that can be appropriated. The principle of the Fund, which is about $50 billion, cannot be spent.

As a part of the deal a Permanent Fund dividend of $1,600 has also been agreed between the House and Senate.

If this plan ultimately prevails, which seems likely, it will still leave a deficit, which has been estimated at between $300 and $500 million. That can safely be taken, for next year at least, from the state’s Constitutional Budget Reserve, which will hold about $2 billion after the deficit for the current state budget, about $2.3 billion, is paid.

State budget director Pat Pitney says it’s important to have $1 billion or more in the CBR account because the state depends on that for cash management through the year, for payroll and other operating expenses.

Senate leaders are comfortable with that arrangement, a half-billion-dollar-hit on the CBR, but House leaders wants a new revenue source adopted this year to preserve a larger CBR, ideally a broad-based tax like an income or sales tax.

It’s an election year and that won’t happen, however.

Even Gov. Bill Walker’s proposal for a modest employment, or wage, tax, has gotten no traction this year among lawmakers.

Last week some House members pushed an increased tax on oil and gas producers to bring in new revenues but most legislators say that is unlikely to get support in the waning days of the legislative session. A fight over oil taxes was one of the reasons why last year’s session became so contentious and extended, and most legislators do not want to see that repeated in an election year.

However, while a general consensus has formed on the fiscal issue, there are important parts still missing that may not get done this year. There is agreement around using a POMV at 5.25 percent, for next year’s budget, and an amount for the Permanent Fund Dividend that is lower than the $2,700 that would be paid if the formula for the PFD now in statute is used.

What’s still missing, however, is having this structure spelled out in statute rather than in budget language. The 5.25 percent draw and $1,600 dividend are in House Bill 286, the operating budget, but they apply only to the next state budget, FY 2019.

“What happens for the following year? There’s nothing stopping them (legislators) from setting a different percentage,” said Eric Wohlforth, an Anchorage attorney and previously the chair of the Permanent Fund’s Board of Trustees.

A bill is pending, Senate Bill 26, that would provide a statutory structure. It passed both the Senate and House last year but in different forms. The bill is still in a House-Senate conference committee, but whether the differences can be resolved and an agreed-on version passed into law is uncertain.

SB 26 provides for a 5.25 percent draw but requires it to be averaged over the previous five years, and since the Permanent Fund and its earnings have been growing the actual draw, the average, would work out to be under 5 percent.

The bill also requires the draw to drop from 5.25 percent to 5 percent after three years, and also contains, at least in the Senate version, a formula for the PDF that reserves 25 percent of the draw to be allocated to dividends.

One of the differences with the House on SB 26 is that the House would have a larger allocation of one-third rather than one-fourth of the earnings draw for the dividend.

Gov. Walker, for his part, suggests a compromise of 30 percent of earnings for the PFD. Sen. Lyman Hoffman, D-Bethel, who chairs the Senate Finance Committee, has pointed out that, for next year at least, the governor’s 30 percent works out to about a $1,600 dividend, the amount agreed on in the budget.

Whether SB 26 or some other statutory guideline for withdrawals passes this year is mixed up in end-of-session wrangling between the House and Senate.

There are reports that the House wants a provision for new revenues, like a tax, to also be included in SB 26, an idea the Senate is resisting.

Meanwhile, there are many who share Eric Wohlforth’s worry that a POMV that is only in budget language could be changed from year to year to meet the needs of that year’s budget. There’s also concern that the 5.25 percent rate of draw is too high, and that it should be lower for the Permanent Fund to be sustained.

Most financial experts who advise on retirement portfolios suggest withdrawal rates of 4 percent to 4.5 percent and the Permanent Fund trustees have urged a withdrawal rate no higher than 5 percent.

The rate at 5.25 percent in the FY 2019 budget appears to have been done for political expediency, to allow for a PFD of $1,600. That scenario being repeated is what worries Wohlforth, that pressures for a higher budget and higher PFD in future years will push legislators to adopt higher withdrawal rates.

There is a nightmare scenario this could create. High withdrawal rates will eat away at money in the Fund’s earnings reserve. Those appear substantial now but after a few years of withdrawals they could be lower. If a major series of market corrections were to hit the Permanent Fund like happened in 2008 the Fund’s earnings would take a hit. Not having enough money for the dividend and the state budget is not unrealistic.