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House leaders push Alaska Permanent Fund earnings as solution to budget crisis

The Republican-led House majority caucus took a major step Tuesday to execute its plan to use the Alaska Permanent Fund to get access to money with which to balance this year's budget, but critics from both outside and inside the caucus have expressed concerns that the plan could threaten future dividend payments.

House Speaker Mike Chenault, R-Nikiski, an architect of the plan, denies it is a threat.

The complicated plan, rolled out behind the scenes as a blueprint last week and as a bill Tuesday, has already drawn opposition but is attractive to the House's leaders because it would enable them to access the $10 billion Constitutional Budget Reserve rainy-day fund without the constitutionally required three-quarters vote.

House Bill 2002 wouldn't spend money from the $54 billion Permanent Fund but would transfer about $5 billion from the fund's earnings reserve, which can be spent with a majority vote, to its principal, which can't.

That itself doesn't have much effect on either the state's budget or the Permanent Fund. But it may have a big effect on the CBR, making it easier to spend. The CBR can be spent with just a majority vote in some cases when the Legislature doesn't have other money available.

Chenault said that moving the money within the fund can make that happen.

Taking $5 billion out of the earnings reserve reduces the amount the Legislature has available to spend, changing the calculation for accessing the CBR. With the Legislature then unable to spend the money now in the earnings reserve, it would have the key to the CBR's billions with which to balance the budget with only a majority vote in each house.

"All it does is take money off the table for government not to be able to spend, and it would allow access to the CBR on a vote of 21 and 11," Chenault said Tuesday on Alaska Public Radio Network's "Talk of Alaska" program.

That would mean Chenault would not have to negotiate with the House minority caucus, led by Rep. Chris Tuck, D-Anchorage. Chenault's majority caucus has 26 members of the 40 member body, but needs 30 votes to access the CBR.

Tuck and his Independent Democratic Caucus have been urging more money for schools, social workers and ferries, among other things, and backing cuts for some programs popular with Republicans such as the Susitna-Watana dam project, Knik Arm bridge, Bragaw Road extension in Anchorage and oil-tax credits.

And Tuck doesn't like messing with the Permanent Fund.

"It is an accounting gimmick to try to get around working with us in a bipartisan manner to get a budget that reflects a spectrum of Alaskans," he said.

By taking the $5 billion in the earnings reserve "off the table," he said, government might not be able to use it to get the state a gas line or to pay dividends.

He warned that depleting the earnings reserve means that when it comes time to pay dividends, there might might not be enough money in that account to pay the calculated amount, a multiyear average of Permanent Fund earnings.

"I think that would be a very unfortunate move. It does put the dividend at risk because there won't be money in the account to pay out the dividends," he said.

Chenault disputes that, saying the money taken from the earnings reserve will quickly be replenished as the fund continues to make money from its investments.

The Alaska Permanent Fund Corp., which manages the fund, provided a letter to Chenault that he said shows that in either "mid-case or low-case return scenarios," it did not appear the transfer would affect the payment of the dividend in upcoming years. Chenault didn't say what would happen in other cases.

House Bill 2002 was introduced by the House Finance Committee, which scheduled its next meeting for Wednesday. A meeting scheduled for Tuesday was canceled after the bill introduction. A discussion of the budget is scheduled Wednesday, but not HB 2002 specifically.

Rep. Mark Neuman, R-Anchorage, co-chair of the committee, said the bill was just an option that was being looked at as a solution to the budget impasse, but had been introduced by the committee with the involvement of Chenault.

"The speaker and I worked together" on the bill, Neuman said.

Several members of Chenault's caucus warned last week in a letter that they were concerned that such a plan had not been thoroughly studied, including its effect on future dividends. Crucially, six members of the caucus signed the letter. If they stick to their guns, the remaining majority caucus isn't big enough to pass the bill.

But legislators are becoming impatient about getting a budget deal and fear that without one soon, the state could be approaching a government shutdown.

"We have to make a decision here as soon as we can," Neuman said Tuesday. "Nobody wants to send out layoff (notices) to government agencies, nobody wants to do that."

But Rep. Les Gara, D-Anchorage, said the state should not be messing around with the fund simply because the some members of the majority don't want to negotiate a budget deal with Democrats.

"Their caucus is split into two camps. One camp wants to negotiate and the other would rather jeopardize the dividend than work on a bipartisan budget," he said.

Gara said he was worried that if the money from the fund earnings reserve was moved to the principal, it would no longer be available to pay dividends if a stock market downturn limited future fund investment profits, from which dividends are paid.

Others have raised fears it would also limit the state's ability to actually pay its bills if oil prices remain low for several years, he said.

The transfer to the principal is structured as a pre-payment of inflation proofing for five years. Those are transfers of money into the principal to ensure the principal is not diminished by inflation. That money was already scheduled to go into the principal but will now be done sooner, and no additional money will go into the principal.

Because dividends are only paid after inflation-proofing is done, that will increase the likelihood the fund will earn enough for dividends to be paid.

The six members of Chenault's 26-member majority objected to the plan in a letter last week.

"We fear that the possible adverse impacts to Permanent Fund dividends cannot be properly evaluated on so short a notice," the six, including Reps. Paul Seaton, R-Homer, Bryce Edgmon, D-Dillingham, Louise Stutes, R-Kodiak, Jim Colver, R-Palmer and Neal Foster, D-Nome, wrote.

They worried what would happen if a historic bull market suddenly made a correction and about the loss of state flexibility if the earnings reserve was not available.

"We are concerned about how manipulating these funds now might impact the ability of the earnings reserve to play an effective long-term role in reaching sustainable, balanced budgets and financing a gas line, they wrote.

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