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Grand fiscal plan is a tough nut, so just do the deed by appropriation

  • Author: Tim Bradner
    | Opinion
  • Updated: September 13, 2017
  • Published September 13, 2017

Voting buttons in the Alaska State Senate. (MARC LESTER/ADN archive 2015)

Can we ever get our act together on our state's fiscal crisis? It seems to defy logic – the tools are there, mainly the Permanent Fund's ample earnings, and we just can't get it done. Next year is an election year, so that probably means nothing happens until 2019, and, oh gosh, 2019 is only a year before the 2020 elections.

Um, no decisions that take guts, please.

I'm beginning to think that maybe it doesn't really matter. Maybe we don't need a fiscal plan, meaning a grand plan encoded in law. Maybe there's a simpler way. I sat talking with an Anchorage business leader last week and I was surprised he feels the same way.

Putting this stuff into statute is a good idea for the long term, but in the short term it complicates things, at least politically. The politics are important because unless you work them out, nothing happens in the Legislature.

I started thinking about this earlier this summer when there was a great deal of teeth-gnashing over the Legislature's failure to pass a package of fiscal reform bills. Those include an income tax, which is a tough nut at any time, but also the restructuring of Permanent Fund earnings management and a capping of the Permanent Fund dividend at $1,000 to $1,200.

Actually, we've come a long way in all this. A general consensus has formed in the Legislature behind the fund earnings change and a lower dividend. Both the House and Senate have approved these ideas in different bills, although a final version has yet to pass into law.

The politics that blocked final approval was the desire of one body to condition its approval to the other body's acceptance of new revenues, so things broke down at the end. Still, achieving that consensus is huge progress.

Those issues aside, what spooked legislators at the end of the protracted 2017 session was the likelihood of a citizen initiative to nullify the fiscal law and perhaps put a fully funded dividend into the Alaska Constitution.

If that were to happen it would be a huge setback to fiscal reform. The wiser course might be to avoid the threat with a Plan B.

I'll get to that in a minute, but first let me describe the fiscal plan that was proposed. It sounded terribly complex when the bills were put forward, but the basic ideas are quite simple.

First off, we created the Permanent Fund in 1976 to save part of our oil revenue for the time oil income runs down — a rainy day savings account. Well, it's raining.

The shale oil guys are going to keep oil at $50 a barrel and our own oil production is one-fourth of what it was, and slowly declining.

It's time to use some of the fund earnings in a measured, organized way – not ad hoc "grabs" to cover each year's deficit.

The first order of business is to switch the fund's archaic payout formula, which is based on percentage cash earnings, averaged over the last five years, to a more straightforward percent-of-market value formula, a procedure most endowments use, including in Alaska.

With a POMV formula, the payout is set a fixed percentage of the fund's market value, although prudence dictates averaging this over several years. Proposals put forth in Juneau would see payouts ranging between 4.5 percent and 5.25 percent.

The present payout method, based on cash received form equity sales, real estate rent and interest on bonds, was designed decades ago when the fund consisted mostly of bonds.

Financial people have told me that the system is very appropriate for a bond fund, which our fund once was, but not for a fund with a mix of assets that include equities like stocks. The POMV is more suited to that.

The bills that passed both the House and Senate, separately, would make this change but also reserve only a part of the fund's income to support the budget. Part would be reserved for a dividend, albeit a lower one, and some would be kept in reserve for any inflation-proofing payments back into the corpus of the fund.

These bills would result in about $1.8 billion to $2 billion going to support the budget and $750 million or so to support a dividend of $1,000 or $1,200. These are relatively straightforward ideas and they respect the first rule of good public policy –- simplicity and transparency.

But there is a hypersensitivity among many in the public to anything affecting the fund, which must be respected. There is also the flak raised by the "don't mess with my dividend" crowd, our peculiar resident Alaska red-state socialists (how weird to tout conservative values with one hand and government welfare with the other).

What I've come to realize is that the proposal to codify these things in law, for now at least, just stirs up stuff and creates the political blockage. Frankly, it doesn't really do anything to codify it in law because the Legislature makes law and can change it at any time. GIven that, why do it?

Despite the fact that it's not really binding, there are still reasons to do it in the long run. It's good to spell out policies so people can read and understand them –- it's that transparency thing.

But in the short run, why not forget enacting the formal fiscal change for now and just do it? Implement the policy through appropriation actions. That's what counts anyway.

The Legislature can actually implement most of these changes through appropriation, for example appropriate fund earnings as if the bills had passed.

An amount equal to what the POMV payout would be for the general fund, would be appropriated from the fund earnings. That's the important part – to explicitly take it from the earnings fund, not the Constitutional Budget Reserve, the reserve account we're using now.

Actually, we have to do this anyway because the CBR is depleted and won't have enough to fund next year's budget, so we have to tap the earnings fund. If we have to do it, let's do it in an organized way.

The dividend cap, by the way, is already a done deal. The Legislature did it through its appropriation in this year's state operating budget, funding a lower dividend. I have heard no squawks from the public.

However, this more informal approach shouldn't be done without public notice, (remember transparency?), because to do otherwise really would look sneaky. What's needed is a really public display of the policy. Gov. Bill Walker is well positioned to do this. The governor has the pulpit, and can use it.

This is an important part of the fiscal fix and one that is doable, but there are other problems still unresolved – whether we should adopt new taxes and whether we should cut spending more. Those big issues are still on the table, leaving  plenty to fight about.

Tim Bradner is copublisher of the Alaska Legislative Digest.

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