Shelley Hughes

Shelley Hughes

State legislators are back in Juneau Monday, Oct. 4, for another try at passing a complex package of fiscal reform bills and constitutional amendments that could lay to rest years of wrangling over the Permanent Fund Dividend, or PFD, among other things.

New revenues, meaning taxes, are likely to be part of the mix if the legislation is to pass.

As it is envisioned now, a package may include:

• Certainty for the PFD by adoption of a “50-50 plan” put forth by the governor include statutory language and a constitutional amendment. The 50-50 plan splits the annual Permanent Fund earnings to the state with half going to support the state budget and half to fund PFDs. The payment is about $3 bilion this year.

• A one-time additional draw on Permanent Fund earnings for “bridge funding” for the transition to a 50-50 plan. This would cover temporary deficits during the transition

• New revenues, of some amount. Senate Bill 53, now in the Senate Rules Committee, proposes several hundred million a year for revenue, but this is likely to change

• A new constitutional spending cap, to replace one now in the constitution, which is ineffective

Part of the package can be accomplished with statutory changes but other parts require constitutional amendments that are priorities for the governor and the majority of legislators. It takes two thirds of the Legislature – 14 senators and 27 House members – to approve constitutional amendments along with approval by voters

This is a high hurdle, said Sen. Shelley Hughes, R-Mat-Su. “Because of ‘super majority needed for constitutional amendments, members of the conservative House Republican Minority will be needed to reach 27 in the House. There will have to be give and take among the different factions to reach these high vote thresholds,” Hughes said in a lengthy interview.

She is pessimistic that there can be a solution with the current House and Senate organizations, however. “I would expect little to no movement on the solution components. It’s likely to be more of the same — kicking the can down the road in the upcoming fourth special session, meaning little will be accomplished unless changes are made to the organizational structures of the two bodies.”

There’s always hope, however. “It will be an uphill battle to make the needed changes to get agreement in October, but not impossible. We saw no action in the House, in the third special session which ended Sept. 14. The Senate did move a bill to the floor in the final hours of the final day – SB 53 – that touched on some of the goals outlined by the House-Senate bipartisan working group over the summer.

“However, it also added language that contradicted the (work of a bipartisan” working group proposal, so there was not support for the bill’s passage. As Senate Majority leader, I tabled the bill. It still needs work,” she said.

One example of the flawed language in SB 53 was the word “may” in regard to the Legislature appropriating funds for the PFD. “The working group stressed the importance of settling the PFD matter with certainty. SB 53, as it emerged from the Senate Finance Committee, ignored this pivotal recommendation,” Hughes said.

One problem legislators are wrestling with is the “linkage” of a 50-50 plan, which creates deficits depending on how it is phased in, with an amount of new revenues to eliminate the deficits. The Constitution requires a balanced budget, so any spending including for the PFD must have a source of funds, so the budget balances.

As SB 53 came from the Judiciary Committee before going to the Finance Committee it required $160 million per year in additional revenues, a proposal put forth in at committee by Sen. Jesse Kiehl, D-Juneau.

The Senate Finance Committee increased this to $700 million in new taxes and tied this amount to the ‘may’ language. In other words, unless $700 million in new taxes were raised, the Legislature could not consider a 50/50 split of the draw, with half going to the PFD — if the Legislature so chose — and half to going to the state budget. Sen. (Scott) Kawasaki (Democrat of Fairbanks) had an amendment to scale the amount back to $500 million but the bill was tabled prior to a vote on his amendment.

A key issue in consideration of the deficit, and a proposed “stair-step” of the PFD from its 2021 amount to a larger amount under 50-50, and the target for new revenues is the amount of “bridge funding,” needed through an extra draw on Fund earnings to cover deficits.

That would be used until expected rising Permanent Fund earnings and amount shared for budget support reduce the deficits. Hughes said seven of the eight working group members concluded that some amount of bridge funding was needed through a one-time additional draw on Fund earnings ranging between $1.5 billion and $3 billion.

“All eight members of the working group had modeled their own scenarios, with assistance of the Legislative Finance Division, and were working from a common set of agreed-upon base numbers, fiscal assumptions,” Hughes said.

“In the scenarios developed, the larger the draw the smaller the amount of new revenues needed. Conversely, the larger the target for new revenues the smaller the extra draw from Fund earnings,” she said.

The issue of the overdraw is sensitive, with strong opinions, and is at the core of much of the disagreement on the fiscal plan. The additional draw refers to going above the 5 percent of market value, or POMV, annual payment from Fund earnings to create the bridge fund.

The POMV was set in state law in 2018 with its allowed draw set at 5 percent yearly of the Fund’s total value, averaged over the previous five years, including unrealized gains. It was felt at the time that 5 percent was prudent and would not jeopardize the long-term growth of the Fund.

At the time that some financial experts advised that even 5 percent is too aggressive to ensure long-term sustainability of the Fund. Because of the averaging the actual draw is less than 5 percent because the Fund’s value grows over the five years. For FY2021, for example, the 5% POMV draw equates to a 3.7% effective rate draw.

Hughes said that currently some funds similar to the Permanent Fund are taking higher than 5 percent effective rate draws in lieu of COVID-19. The bridge funding of $920 million for FY2022 proposed by the Senate Judiciary Committee, along with the 5 percent POMV draw of $3.1 billion, would equate to a 5 percent effective rate draw, Hughes said.

Hughes said that Milan Rietsveld, a global investment fund expert, had advised the Judiciary committee that this draw would not be considered reckless or imprudent, but reasonable. The POMV draw now provides about 70 percent of general fund revenues.

If the current growth trend continues the annual POMV will gradually increase along with the revenues paid to the state. Even if the 50-50 dividend plan goes into effect, so that half of the payment goes to PFDs, the expected growth of the earnings could reduce and eliminate the deficits over a few years, Hughes said. That assumes the assumptions behind that growth remain valid.

“In fact, the Senate President Sen. Peter Micciche, R-Kenai) believes in 15 to 20 years, Alaska will have the reverse problem it has now: too much money for government. Even stress-tested, projections of the Permanent Fund show it growing steadily so that the 5 percent POVB draw will yield more than is needed for the state budget in less than two decades, Hughes said

There are opinions in the Legislature, also held by the governor, that an overdraw of some amount done once can be afforded to provide the transitional bridge funding for the 50-50 plan. There are other legislators, however, who worry that an overdraw will not wind up being a one-time event and that it will lead to continued additional draws and over time gradual depletion of the Permanent Fund’s earnings reserve.

Hughes doesn’t think this will happen “The backstop to prevent this from occurring,” she said, would be the passage of the PFD-certainty constitutional amendment that would provide protection of the earnings reserve from repeated additional draws by the Legislature,” she said. That would happen because the 5 percent draw would be in the Constitution, and inviolate, and not in statute as it is now where the Legislature is not bound to respect it.

“Many legislators don’t realize the potential of a very large Permanent Fund because the current projections typically don’t go much beyond 20 to 30 years. We could have a flipped situation before too long with more money available for government than is needed,” Hughes said.

“That’s another reason why the Constitutional spending limit is important now. But it also means that the gradual stair-step of the PFD up to 50-50 may not really be necessary. The concept that we need to hold back and not exceed the (5 percent POMV) limit, and that we can’t take extra money for bridge funding, is false,” she said.

“It is vital that Alaskans understand that the deliberations over the summer of eight diverse members of the Legislature who comprised the (bipartisan) working group were thorough, represented regions across the state as well as political ideologies.”

Within a week after the proposal was made public, approximately 50 of the 60 legislators wanted to move forward with the working group’s recommendations, Hughes said. However, of the estimated 10 that did not, their positions and chairmanships allowed them to halt the components from moving forward — and that is exactly what happened, she said.

“A handful of legislators stymied progress on the grand solution and nothing was accomplished in the third special session. Unless there are structural changes, I would not expect the results of a fourth special session to be any different,” Hughes said.

Finding a compromise on this issue; the split of the POMV; whether a Fund earnings draw should be done and for how much, and whether an effective spending cap can constrain budget growth, are important to resolve differences over the fiscal package.

People want to see the PFD issued settled, Hughes said. “They see that the Permanent Fund is growing, and they don’t want to see it just spent away on project and programs. The Legislature has been ‘wrapped around the axle’ far too long on the PFD issue and it is past time we settle the matter,” she said.

“It is wrong in my mind to not move forward the components of the solution proposal. It is a tremendous disservice to Alaskans to kick the fiscal can down the road and keep us from doing other important tasks,” Hughes said.

“Other important business is being shoved aside, such as working to reduce the sexual crime rate, opening up opportunities for economic diversification in Alaska, and helping our schools move academically from the bottom of the pile nationally upward, she said.

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