Are they close to a deal on fiscal gap?

Are they close to a deal on fiscal gap?

There seems to be a deal coming together on SB 26, the bill that sets a percent-of-market-draw,
or POMV, in statue as a rule for using Permanent Fund earnings to support the state budget. This is the remaining big issue of the 2018 session and if an agreement is made in the next couple of days a rush to adjournment could begin. An adjournment push should happen even if the deal does not come together, too.

Word has been circulating in the capitol since late last week that House and Senate leaders are close on this, and the fact that the weekly press briefings by both the Senate and House Majorities and the House Minority were canceled last week reaffirmed that something was cooking.

A key signal came Saturday when the conference committee on SB 26 met for the first time in a year (the bill passed both the Senate and House last year in differing forms). It was a short procedural meeting, lasting perhaps five minutes, in which committee members agreed to ask the House Speaker and Senate President for limited powers of free conference in certain sections of the bill. Those sections are the import- ant ones, dealing with determination of the Permanent Fund’s net income, how a POMV mechanism would work including a five-year trailing average and how the Legislature would make its appropriation from the Fund’s earnings reserve.

What this signals is that after the powers of free conference are granted, which will most likely happen Monday, the conference committee will meet again to discuss proposals in detail. Our guess is that propos- als are already worked out and agreed on, and what happens in the committee will be mainly procedural. For background, a House-Senate conference committee can only work to reconcile provisions present in either the House or Senate bill or in both bills in different forms. A new idea, not in one of the two bills, cannot be presented unless the committee is granted powers of “free conference,” which means new ideas can be brought in. Typically that is limited to certain sections, as is the case with SB 26.

What we’re hearing is that the committee may use the 5.25 percent POMV now in SB 26 (also used in the FY 2019 operating budget for next year) with the five-year averaging, which will bring the actual with- drawal down to about 4.7 percent of the Permanent Fund’s market value. What may be different is a change in the way the Permanent Fund dividend is calculated, we hear. In the current versions of SB 26 the Senate allocates 25 percent of the POMV withdrawal to the dividend and 75 percent to the state General Fund,
and the House allocates 30 percent to the PFD and 70 percent to the General Fund. When the conference committee meets there may be a different idea.

Here’s where things stand now; still a deficit, though smaller

As things stand now both the House and Senate are agreed on a one-year POMV of 5.25 percent that is in the language of HB 286, the FY 2019 operating budget that is in a different conference committee. There is no five-year averaging, so the full 5.25 percent withdrawal stands. A $1,600 PFD for 2018 is also agreed on, and is in the budget.

Even by itself, absent SB 26, this is a milestone. For the first time the Legislature has decided to use Permanent Fund earnings to help support the budget and to use a POMV percentage as is typical with large endowments, even though it is only for FY 2019. What SB 26, or something like it, does is establish the rules for future withdrawals. Absent that, the Legislature could set a different withdrawal rate ad hoc each year depending on budget needs.

Some background: The 5.25 percent POMV withdraws about $2.8 billion from the Permanent Fund’s earnings reserve, which now holds about $13 billion. About $1 billion of the withdrawal will be used to fund the $1,600 PFD dividend, leaving about $1.8 billion for the General Fund. Ordinary state unrestricted revenues, still mostly from oil, are estimated at $2.2 billion for FY 2019. Combined, these provide about $4 billion to support the state-funded operating and capital budgets. It’s still uncertain what those will total (the budgets are not yet approved) but $4.5 billion in unrestricted General Fund spending is an estimate.

A deficit of several hundred million dollars remains, although it is far lower than the $2.3 billion deficit that would occur absent the POMV. The House and Gov. Bill Walker have proposed that the remaining defi- cit be covered by new taxes, either some form of broad-based tax (House) or a more targeted employment, or wage, tax (Governor) but 2018 is an election year so no tax is likely. Instead, the deficit will likely be funded from the Constitutional Budget Reserve, or CBR, which will still have $2.1 billion at the start of FY 2019 next July 1. State budget officials stress that it is important to have at least $1 billion and ideally more in the CBR for state cash management during the year, to meet payroll and other expenses (revenues come at times that don’t always coincide with cash needs).



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