State legislators may be home briefly – or they may not; state budget goes to the brink

State legislators may or may not be home this week. The Legislature’s special session ended Friday, but Gov. Mike Dunleavy may keep them in Juneau to finish work on the state budget.

The governor also ordered layoff notices to be sent to several thousand state employees if there is no budget agreement by late Friday. This is procedure that is required if budget approvals are not made as of a certain date.

Time is short. There’s a little over a week before the fiscal year ends, and if a budget isn’t in place by July 1, many state services will shut down.

“Active discussions are underway with legislative leadership and, my administration is standing by to provide whatever assistance it can,” the governor said. “It’s my hope that some of the maneuvers and brinksmanship that crafted this budget be put aside and the result in a constitutionally sound budget that serves all Alaskans because we are running out of time.”

If they do get home, legislators will be barely unpacked before having to get ready to return in Juneau in early August for a second special session, once again on the Permanent Fund and dividends. But there will also be a long list of other topics including constitutional amendments on state spending, voter approval for new taxes, and possibly more.

It’s a lot to get done in 30 days, the limit for special sessions. If things are still unfinished, the governor may have to call yet another special session for October.

The first special session that ended Friday, June 18, was to focus on the governor’s proposals for a constitutional amendment restructuring the Permanent Fund and putting the PFD into the constitution along with a new method of calculating the dividend.

Legislators were also to finish work on the FY 2022 budget, which must be approved by June 30.

A budget was agreed on but not all its funding. A three-quarters vote of the House and Senate is needed to vote funds from the Constitutional Budget Reserve to complete the funding. The approval by 40 of 60 House members and 15 of 20 senators was not forthcoming.

On the restructuring of the Permanent Fund, part of a comprehensive fiscal plan developed by the governor, extensive hearings were held in House and Senate hearings but no actions were taken.

That means those items will also be on the list for August along with the other matters.

One of the other matters is “new revenues” for the new state financial plan. Those were mentioned by Dunleavy when he issued the call for the second special session, but no details were provided. Specifics will come in August, state Revenue Commissioner Lucinda Mahoney told the Senate Finance Committee in hearings June 11.

“The governor recognizes there are a lot of ideas, and he is open to discussion,” Commissioner Mahoney said. “However, the math in this model works,” for a comprehensive fiscal plan. What is open for discussion are the decisions on policies that drive the model, she told the senators.

Dunleavy’s fiscal blueprint, in outline form, calls for $300 million in new revenues and $200 million in further budget cuts in 2023 and 2024, a total of $500 million a year needed to make the plan work.

The core of the plan, however, is reserving 50 percent of the annual Permanent Fund earnings contribution to support the state budget to fund PFDs.

That would put the 2021 PFD at just over $2,300, which would rise in the years following as the Fund and its earnings grow. However, it would also cut in half the money the Fund now provides to the state for the budget. The contribution would be just over $3 billion without the governor’s plan and $1.5 billion with it.

Sen. Natasha von Imhoff, R-Anch., a member of the Finance member, said the governor’s “50-50” plan to share the POMV with the dividend would leave a multi-year billion-dollar-plus deficit. The new revenues, most likely taxes, and the spending cuts can cover part of this, “but there’s still a huge hole,” von Imhof said.

“This will take a lot out of the economy to pay a PDF,” she said.

Dunleavy’s plan, however, is to cushion the transition with a transfer of $3 billion from the Permanent Fund’s earnings reserve to the state General Fund. The combination of the “bridge” funding with the new revenues and spending cuts would sustain the budget until growth of the Permanent Fund and its earnings shared with the state would allow state finances to be sustained.

But the plan still needs $500 million in some combination of revenues and cuts. David Wilson, R-Mat-Su, another member of the Senate committee, said he has estimated that if taxes are relied on solely the burden to bring in $500 million in new revenues would be $1,300 to $2,100 per year per citizen, depending in what kind of tax is adopted.

Mahoney responded that anticipated growth in Permanent Fund earnings and in the annual POMV payment to the state would result in reductions in the deficit over a few years.

Assuming the Fund’s long-term growth target of 6.5 percent per year is met and the payout is 5 percent, the Fund’s total value will grow over time and with it the POMV. Over a few years this will erase the deficit and create a surplus, she told the committee.

Sen. Bert Stedman, R-Sitka, the Senate Finance cochair, said he believes the $200 million goal in budget cuts is unrealistic without major changes in programs, which will require legislation put forth by the administration. Unless these proposals are ready by August for the second special session the cost savings won’t be met, Stedman said.

The Legislature has struggled to trim budgets for years and has been unsuccessful in securing overall reductions, Stedman said. The ferry system and university have been cut, but savings were offset by increases in prison costs and public pensions, he said.

The Sitka senator also called the $3 billion transfer from Permanent Fund earnings a “raid” on the savings and said once the spigot is opened to take money from the earnings above the annual draw now allowed it will not be closed.

Several lawmakers said petroleum tax changes could be part of any new revenue package.

In previous briefings Senate President Peter Micciche, R-Kenai, said that tax changes on oil and gas producers are likely to be part of the discussion of new revenues in August.

Stedman mentioned the per-barrrel oil production tax credit allowed North Slope producers, and also concern that one new major North Slope producer (Hilcorp Energy) is not an IRS “C” corporation, and because of that pays no state corporate income tax.

Stedman also said recent changes in the federal tax code have worked to the state’s detriment, an implication that the Legislature may change the state tax code to offset negative effects.

Sen. Bill Wielechowski, D-Anch., also mentioned the oil production tax credit, as he has in the past, noting that eliminating the tax credit will bring $800 million in new revenue.