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Lisa

Brad Keithley’s chart of the week: A relook at the Fiscal Policy Working Group proposal

Last June (2021), in the midst of efforts to resolve the FY22 budget, the Legislature established a bi-partisan, bi-cameral working group for the purpose of “… developing policy recommendations that will provide fiscal certainty to Alaskans into the future through means of achieving a balanced budget and resolving the annual dispute over the Permanent Fund Dividend.”

The “Fiscal Policy Working Group” (Working Group) as it was known was composed of eight members, including two from each of the majority and minority caucuses in each of the legislative bodies, plus four alternates, one each from each caucus.

The group was philosophically diverse, spanning from some of the most conservative members of the Legislature to some of the most progressive. The group also included one member each from the Senate Finance (majority caucus) and House Finance (minority caucus) Committees, and two members from the House Ways & Means Committee (one each from the Majority and Minority Caucus).

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Over the course of the following two months, the members held various public information and internal work sessions and on August 16, 2021, produced a “Final Report” that, given the broad span of the membership, surprisingly included unanimous recommendations in certain, key areas and broad parameters of agreement in others.

Importantly in their conclusion, the members said this:

The FPWG believes the legislature must pass a comprehensive solution. FPWG members do not support addressing only one or two issues to the exclusion of others. The FPWG believes addressing these issues as a comprehensive solution solves not only a fiscal challenge but a political challenge as well.

Somewhat surprisingly given the ability of the diverse membership to reach broad areas of agreement, the recommendations appear to have landed with a thud in the full Legislature. Aside from cursory overview hearings in the two finance committees and before House Ways & Means, the Report appears to have been given little consideration.

To our knowledge, no legislation implementing the group’s recommendations has been filed. While SB 199 says that it is in the statement of legislative intent, in practice it’s just a way of implementing immediate PFD cuts while kicking the other issues down the road. It does not provide for the “Constitutional Certainty of the PFD,” and is not the sort of “comprehensive solution” envisioned by the concluding paragraph to the Final Report. Instead, at its core it resolves “only one … issue to the exclusion of others,” an approach that the Report specifically condemns.

In effect, it sets up a “bait and switch” of appearing to promise a POMV 50/50 PFD, but only on conditions unlikely to be attained once a lower PFD is locked in.

Rather, as with SB 199, the Finance and Ways & Means Committees have continued the old ways that led to the impetus for the formation of the group in the first place, pursuing piecemeal, winner-take-all solutions to the various fiscal issues that have met with predictable opposition from those on the other side, without any real efforts to design an overall compromise that could actually survive the full legislative process (including review by the governor).

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Other than the cursory overview hearings and SB199, the only other time that the recommendations have subsequently surfaced, publicly at least, was earlier this month, during the debate on the House floor on the operating budget.

There, in response to a proposed amendment to include a POMV 50/50 PFD in the budget – one of the interconnected recommendations of the Working Group – Representatives Geran Tarr (D – Anchorage), Ben Carpenter (R – Kenai) – a member of the Working Group – and others introduced an amendment to the amendment, providing as follows:

It is the intent of the legislature that this 50-50 proposal for the dividend be part of a full fiscal plan that includes a spending cap, $300 – $500 million of new revenue, and continued work at budget reductions.

For those interested, the subsequent debate on the amendment was somewhat enlightening, with various members articulating both their support for and their concerns about the approach. To a degree, some of the concerns were the same as those with SB 199; while the amendment said that it was legislative intent to address the other issues, the only thing the amendment would actually do immediately is provide for a POMV 50/50 PFD.

While the amendment to the amendment reflecting the intent language passed the House 22-17, the overall amendment to include a POMV 50/50 PFD to which it was attached subsequently was defeated 16-23. All of the House members who were members of the Working Group voted in support of the amendment to the amendment, except, somewhat surprisingly given the unanimous recommendation of the Working Group for such a comprehensive solution, for Representative Calvin Schrage (I -Anchorage).

In our view, while the fiscal ground has shifted somewhat since the date of the Working Group’s Final Report, its proposals continue to remain both relevant and timely.

Here is the agreed fiscal outlook that the Working Group used as its baseline during its deliberations. The Working Group looked at the period FY22 through FY30. Because FY22 is almost over, we have concentrated here on the results from FY23 through FY30. The results under a continuation of the current law, statutory PFD is the left bar for each year. The results under POMV 50/50 are on the right.

Under the baseline, continuing the statutory PFD (left bar) over the period from FY23 through FY30 would result in an average annual deficit of $1.26 billion.

To address that, the Group recommended a comprehensive, multi-pronged approach which included restructuring the PFD to a POMV 50/50 approach (right bar, reducing the deficit to an average of $640 million per year), raising new revenues of between $500 million and $775 million, adopting budget reductions of between $25 million and $200 million “over multiple years,” and implementing spending limits to prevent future spending growth from outstripping revenues.

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Of course, since that time the outlook for both near term and future oil prices, and with them, traditional revenues, have changed materially.

To take a look at the impact we have updated for the same period both projected revenues using current oil price projections (based on the futures market), and projected spending levels using current inflation expectations (based on the treasuries market).

 

The baseline used by the Working Group for the average for FY23-30 and for FY30, the last year of the period, are the first two pairs on the left of the chart. The updated results for projected oil prices and inflation are on the right. As with the previous chart, the results of continuing the current law, statutory PFD are the left bar, the results of using POMV 50/50 are the right bar of each pair.

What these demonstrate is that while the current oil price surge delays the conditions addressed by the Working Group for a few years, it does not eliminate them.

While on average over the same time period as covered by the first chart, the updated deficits resulting from the continuation of the statutory PFD are less than those projected by the Working Group, and restructuring the PFD to POMV 50/50 produces a slight surplus on its own (red below the bar), by the end of the period (FY30, only 7 legislative sessions from now) the state’s finances are nearly back to the same condition as confronted the Working Group.

Where the Working Group projected FY30 deficits of $920 million and $410 million under the statutory PFD and POMV 50/50 cases respectively, the updated results project deficits of $900 million and $400 million, almost exactly the same.

In short, the current oil price spike hasn’t eliminated the fiscal challenges confronting Alaska; instead they have just bought the state a bit more breathing space before they return.

That breathing space is important. One of the underlying themes repeated throughout the Working Group report is the need for time to implement its recommendations. For example, the Working Group recommended “that the legislature work towards a 50%-of-POMV-draw PFD formula,” and “work[] towards revenues on the order of $500 – $775 million.” On budget reductions, the Working Group recommended that the legislature “work towards reductions in the $25-$200 million range over multiple years.”

In explicit recognition of the need for time, another section emphasizes the need for a “several-year ‘transition period’ with one-time fiscal measures.” The seven legislative sessions – and actually, more like four until the two results start to narrow – seems even shorter in that context.

To us, the Working Group’s Final Report represents an important step forward in resolving Alaska’s long term fiscal plan. Its outline of compromise steps and recognition that any solution needs to be comprehensive in nature, simultaneously addressing all of the various issues and interests, is critical to building a resilient, durable fiscal approach.

Neither side – neither those advocating balancing the budget through deep PFD cuts alone nor those pushing “spending cuts only” – reasonably should expect a durable, “we win, the other side loses forever” outcome. Continued efforts to do so will just result in a continuation of what we have seen over the last six years – legislative stalemate and continued uncertainty.

Moreover, neither extreme is good for Alaska. In 2019, Alaskans clearly demonstrated through a strong majority of their legislative representatives that they want to maintain a significant level of government services. And as we’ve explained repeatedly, at the other extreme relying solely – or even mostly – on PFD cuts to balance the budget, such as the Alaska House Majority Coalition’s current darling of POMV 25/75 proposes, is neither equitable to all Alaska families, nor the best option for the overall Alaska economy.

But the Working Group’s recommendations are only a step. In order to achieve a resilient, durable future they need to be implemented. If this Legislature continues to ignore them or attempts to adopt them only in part – as currently appears to be the case – we are hopeful that Alaskans will look for other candidates this coming election cycle that are committed to implementing them in the next.

Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on its Facebook page or by subscribing to its weekly podcast on Substack.

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turbodigits
5 months ago

I’d like to know if any of our legislators are aware of the things you’ve been pointing out in this series of articles. If so, how many? If not, why not?

Are they aware that their resistance to revenue other than Permanent Fund earnings (i.e., taxes) creates an appearance of self-dealing? Why aren’t they talking to us about this?

Last edited 5 months ago by turbodigits
AK Chris
5 months ago

Thanks Brad
good read. I don’t always agree but you make decent objective reporting, which I truly appreciate. Does the loss of 30k or so in our population make a difference?