A pair of bills that would establish a new limit on state spending were advanced by the House Judiciary committee Monday, but many obstacles await the proposal as it advances through the Legislature.
The policy would create a tighter cap for spending on state capital projects and services, replacing the limit that currently exists in the state constitution. Unlike the existing cap, which is tied to state population and inflation, the new cap would tie spending to the state’s gross domestic product, a metric that is not currently used by any state to limit spending.
The proposal passed its first legislative hurdle — with many more to come — after years of lawmakers pushing for a new cap on state spending, under the premise that the existing cap allows the state to spend more money than it has at its disposal in any given year.
The committee advanced two separate measures which include a new statutory limit set at 11.5% of state GDP, and a constitutional limit set at 14% of state GDP. The policy would subtract the public sector when calculating the GDP. The budget proposed by Gov. Mike Dunleavy for the coming fiscal year would exceed the proposed statutory limit but remain below the proposed constitutional limit.
The policy was originally proposed by Sen. James Kaufman, an Anchorage Republican, who said it would ensure the state does not overspend when state revenue — which is largely dependent on oil prices — is high, leaving reserves for years when revenue plummets. By pinning state spending to gross domestic product and subtracting the public sector, Kaufman said the spending cap would incentivize private sector growth and prevent the state’s economy from becoming overly reliant on the Permanent Fund.
Rep. Will Stapp, a Fairbanks Republican who is the lead sponsor for the bills in the House, was absent from the committee hearing on Monday.
The bills advanced out of the committee despite unresolved questions about how the policy would impact the state’s budget and fiscal policy, including how the plan would address inflation. Republican committee members said there would be additional opportunities for feedback in future hearings. The measures head next to the House Ways and Means Committee and the House Finance Committee. Similar bills in the state Senate have not yet been heard in committee.
“This is only the first step in the committee process for this piece of legislation and there will be other times to provide feedback from the public,” said Rep. Ben Carpenter, a Nikiski Republican who chairs the House Ways and Means Committee.
Because the policy would require amending the constitution, at least two thirds of both the House and Senate must approve the measure.
Rep. Cliff Groh, an Anchorage Democrat, hinted at the challenges yet to come for the policy while speaking against it during the House Judiciary committee hearing on Monday.
“The consequences of getting it wrong would be disastrous,” said Groh, citing University of Alaska Anchorage economics professor Kevin Berry, who said tying state spending to gross domestic product could hamper the state’s ability to recover from economic downturns.
Groh also noted that because the cap does not apply to the Permanent Fund dividend, it misses a key element of past spending spikes that the spending cap seeks to resolve. Dunleavy’s proposed $3,900 dividend would cost the state more than $2 billion in the coming fiscal year, far exceeding the cost of any state program that would fall under the cap.
A bipartisan working group recommended in 2021 a framework for a new fiscal plan that included a tighter spending limit, alongside other elements such a new formula for the Permanent Fund dividend and new revenue sources. Lawmakers did not act on the recommendations from that group, which included advancing all elements of the plan concurrently, but have said they will use the plan as a starting point for renewed discussions this year.
“A comprehensive solution to Alaska’s fiscal troubles requires a number of pieces of legislation moving together,” Groh said. “I just think that forging ahead with the spending cap while leaving the other pieces behind is counterproductive.”
Groh said he still supports a revamped spending cap but would like to see one pegged to population growth and inflation rather than gross domestic product.
“I think this plan is not the right plan, and that the timing is wrong,” Groh said.