With compromise on PFD, House appears ready to pass a budget

The state House appears ready to finally pass a state operating budget after a tumultuous week.

Last Monday, in a vote on the floor that split Republicans and Democrats, the House voted 21 to 19 to add almost a billion dollars to the budget and raise the Permanent Fund dividend to $2,650.

On Friday, after five days of behind-the-doors wrangling, the House changed its action, adding only enough money for a $1,600. That’s still higher than the approximate $1,250 contemplated in various spending plans being discussed between the House and Senate.

Several house members switched their votes between Monday and Friday to vote for the lower dividend, including House Speaker Bryce Edgmon and Reps. Scott Kawasaki, D-Fairbanks; Geran Tarr, D-Anch.; John Lincoln, D-Kotzebue, and Tiffany Zulkosky, D-Bethel, all who had voted Monday to support the higher dividend.

Also, some Republicans who voted against the high dividend last Monday shifted their position by Friday to vote against lowering the amount to $1,600, including Reps. Lance Pruitt and Chuck Kopp, both of Anchorage.

All Mat-Su House members voted for the higher dividend and against the change later in the week to lower the amount, although some lawmakers were excused and absent for the Friday vote.

The controversy brought a stop to almost all legislative work in the House for the week as committee meetings were cancelled so members could attend closed-door caucus sessions. There was a ripple effect in the Senate because senators had expected to receive the operating budget and had to delay final work in their own budget subcommittees because of the delay in the House.

Overall, the Legislature is now several weeks behind schedule in its budget work, which means the 90th-day deadline in mid-April, which is set in statute, will be virtually impossible to meet. The state Constitution sets a 120-day deadline, however. That will come in mid-May.

Prior to the dividend votes the House was considering a Fiscal 2019 budget of $4.22 billion in state Undesignated General Fund, or UGF, expenditures, about $42.6 million, or 1 percent higher than Gov. Bill Walker’s requested amount.

House Republicans criticized additions in spending made at the last minute in the House Finance Committee, pointing out that the budget overall is about 6.7 percent higher than last year in total UGF spending, or $285 million.

The House version of budget is higher mainly because of more money for Medicaid, the state-federal program that provides health care mostly for elderly disadvantaged Alaskans and children in low-to-moderate income families, as well as additional funds for public safety and the University of Alaska.

While revenues are expected to be up next year due to gradually rising oil prices the deficit is still estimated at between $2.3 billion and $2.5 billion, and the higher payments for dividends will add to that.

It’s unclear just what action the Senate will take in its version of the budget and on the dividends, but earlier senate leaders had said that funding the budget will require draining remaining money in the state’s two main savings accounts, the Constitutional Budget Reserve and Statutory Budget Reserve and taking some money from Permanent Fund earnings for the first time.

While the principle of the Permanent Fund cannot be spent the savings can be, and over several years about $14 billion in earnings have accumulated in the Fund’s earnings reserve account. To date that money has been used only to fund the annual citizen dividend and, in past years, to inflation-proof the fund.

Despite the squabble over the dividend most Senate and House members now agree that some of the Permanent Fund’s annual earnings will be needed to help fund the state budget from now on.

It’s considered unlikely that oil prices, and oil production, will rise enough to fund the budget in the near term, and imposing $2 billion-plus in new taxes on citizens would severely impair the state’s economy. House leaders have proposed new broad-based taxes that would contribute some new revenues, which the Senate has rejected, but its likely the main pillar of state finances will be earnings from te $60 billion-plus Permanent Fund.

The Permanent Fund’s trustees, however, say that must be done in an orderly, structured way, and not by ad hoc appropriations every year by the Legislature.

The most widely agreed-on mechanism for orderly withdrawals is to adopt a procedure commonly used by large endowments, which is to withdraw an annual percentage of the Fund’s market value at a rate below the annual earnings so that the Fund can be sustained.

Legislators are considering percent-of-market-value, or POMV, withdrawal rates ranging between 4.5 percent and 5.25 percent. Historically the Fund has earned about 8 percent on its total value.

Last year the Senate and House both passed different versions of Senate Bill 26, which put the POMV plan in place and also provide a new formula for setting an annual citizen dividend.

While different versions of SB 26 have passed both bodies the differences have not been reconciled, with the structure for setting the PFD being the issue still in disagreement. The bill has been in a House-Senate conference committee since last year, waiting for the dividend question to be worked out.