Walker wants balky House to act on using Fund earnings

  • By ELWOOD BREHMER
  • Wednesday, June 15, 2016 9:28pm
  • News

All eyes are on the House Finance Committee.

The only legislative committee meeting late in the special session, it met for nearly seven hours on June 14 to hear testimony from the administration, the Alaska Permanent Fund Corp., and the public on Senate Bill 128, the compromise proposal to establish a structured annual draw from the Permanent Fund earnings reserve account.

The mechanics of the bill have been discussed at length since it was changed from an annuity-style draw to a percent of market value, or POMV, approach months ago in the regular legislative session.

At this point, the focus is, unsurprisingly, on the dividend.

SB 128 would change the Permanent Fund Dividend calculation from strictly a percent of Fund earnings to 1 percent of the Fund POMV plus 20 percent of state resource royalty revenue.

The sticky wicket is that means this year’s projected record-high PFD of nearly $2,200 per Alaskan would be reduced to $1,000, as the bill also ensures $1,000 PFDs for three years, after which the new formula kicks in.

The new formula is also projected to kick out dividends in the $1,000 range based on stock, oil price and production forecasts.

The Senate passed the bill June 6 on a 14-5 vote, but House members hearing from constituents angry about the prospect of smaller checks are unwilling to make an unpopular vote.

“Everybody knows the votes are not there (among House members) for this bill as it is written,” Rep. Les Gara, D-Anchorage, said June 14.

Anchorage Republican Rep. Lance Pruitt said the concerns are bipartisan and that much of the worry is that SB 128 is the beginning of a “slow creep” to take the PFD away.

In a June 15 press briefing Gov. Bill Walker commended the Senate for its June 6 vote that “ensured the dividend program would continue,” he said.

“What’s remarkable about (the Senate) vote is it was a bipartisan vote. You had some Republicans; you had some Democrats. It was not a party line vote at all and I cannot thank them enough for that,” the governor said.

Walker also reiterated what he, members of his administration and business groups that support revamping how the Permanent Fund is used have said countless times since the governor’s New Sustainable Alaska fiscal plan was unveiled in December.

“Without changing, without Senate Bill 128, the Permanent (Fund) Dividend program in a few years will go to zero,” Walker said. “No one has disputed that. It’s not debatable.”

That’s because without overhauling how state services are paid for, or without a dramatic and unforeseen rebound in oil prices, the current $3.5 billion or so annual budget deficit will drain the Constitutional Budget Reserve within two years.

After that, the state would have to start burning through the Permanent Fund earnings “ad hoc” style, which the administration insists would eliminate the PFD by 2020.

The 5.25 percent POMV draw called for in SB 128 would provide a smaller, but sustainable draw from the earnings of the Fund. It is supported by the nonpolitical Alaska Permanent Fund Corp.

The governor added that “no action is unacceptable,” not-so-subtly implying that he will call the Legislature back into another special session if some form of Permanent Fund restructuring legislation is not passed by June 22, then end of this current 30-day special session.

Walker talked with many members of the House by phone over the weekend, he said, and possible changes to the bill to garner more support were discussed.

However, he told reporters that keeping the status quo on the dividend simply wouldn’t work.

“We’re going to get across the finish line,” Walker said.

That’s not how North Pole Republican Rep. Tammie Wilson sees it. She said emphatically during a brief and very poorly attended June 14 House floor session that cutting the dividend would be the “biggest mistake” the Legislature could make at a time when Alaska’s economy needs all the fiscal infusion it can get.

“Reducing the dividend down to $1,000 could be one of the biggest things we could do to negatively affect our economy so therefore I don’t care how many times the governor wants to call us back if this bill (SB 128) doesn’t pass because I will stay here, and I know a lot of my colleagues will, to do what’s best for Alaskans no matter where this bill goes,” Wilson said.

University of Alaska Anchorage Institute of Social and Economic Research Director Gunnar Knapp said in an interview that not infusing the economy with roughly $750 million — the collective PFD reduction — would undoubtedly impact the economy, but it’s not that simple.

Knapp’s report entitled, “Short-Run Economic Impacts of Alaska Fiscal Options,” has been used continuously this year as a reference for measuring the potential impact of state budget cuts, new taxes and the like.

In House Finance the banter was that the PFD cut would cost the economy upwards of 8,000 jobs. Knapp said his low-end calculation actually put the impact at about 4,200 jobs with a high potential impact of about 6,600 jobs.

“Nobody wants to do anything that hurts — why would they? — except that we don’t have any choice. Over the next three to four years we’re going to have to do a few things that hurt and the sooner we do them the sooner we’ll fix the problem and the more savings we’ll be left with,” he said.

“You can (preserve spending) by continuing to draw down on your savings but you need to think about the consequences of drawing down your savings.”

The credit ratings agencies continue to hint at those consequences.

Fitch Ratings quietly became the last of the “big three” ratings agencies to downgrade Alaska’s credit rating from AAA to AA+ when it announced the action June 14 as House Finance prepared for the first installment of its marathon meetings.

On June 9, S&P Global Ratings — the first agency to downgrade its rating for Alaska back in January — put the State of Alaska on “CreditWatch with negative implications,” an indication that further, more significant downgrades are coming if a long-term budget solution is not realized.

Walker said the downgrades send a message “across the country that something is wrong with Alaska.” His concern is that future downgrades would have a “chilling effect” on private investment in the state, the governor said.

Revenue Commissioner Randy Hoffbeck said during the governor’s press conference that going from AAA to AA+ roughly equates to a 0.25 percent interest rate increase on bonds the state tries to sell, which alone is not catastrophic.

“We recognize that AAA to AA+ is a fairly minor change — that one-quarter of 1 percent, even though it does add up — but we’ve got S&P saying they’re looking at a one, two or three more notch downgrade. Now we’re talking about really big dollars so there’s a lot of concern,” Hoffbeck said.

The downgrades also impact local governments that bond for school and city projects on the back of the moral obligation of the State of Alaska, allowing them to capture better interest rates based on the state’s credit rating.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

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