News from Hughes » May 29, 2017

So in two ways, we’re NOT in a crisis: 1) the sky is not falling as far as our reserves; and 2)  we’re not at bare bones in our departments – there’s still room to reduce the operating budget. This begs the question: is it right for the legislature to come for your wallet at this time? I don’t believe it is.

We have a spending problem not a revenue problem. We spend 4x more than what Idaho spends per person. The truth is, we can still make multiple, sensible reductions without sacrificing essential services. (And, btw, I don’t expect us to get down to the level of Idaho, because Idaho’s local governments provide services that we in Alaska rely on the state to provide.) So how do I know we’d be okay as far as still being able to provide essential services after further reductions? Accounting for population changes and inflation – so in today’s dollars – we are spending about $1 billion more than we were when Gov. Knowles exited office in 2002. We were fine then and we’d be fine now (healthcare costs are higher now so this is one item we’d need to factor).

Along with the reductions, we need to update our constitutional spending cap with an inflation and population adjustment mechanism so we don’t find ourselves back in the same boat in the future.

We can do that without draining our reserves. Because our small population can only bear so much, we can’t close the gap mathematically without more reductions. If we do what Connecticut did in the 1990’s – institute an income tax before reductions – we can expect an out-migration and downturn like they had, except worse. Why worse? 1) We’re already in a recession and pulling money from the private economy will deepen and prolong it according to the experts; and 2) we’d move from #8 to the #1 costliest state for residents, so the out-migration of productive workers and retired folks would be greater than what has happened in other states – and the economic chain reaction would be ugly.

So what is my proposal?

To fill the fiscal gap while we make reductions, we’ll need to use some reserves. Don’t panic. We won’t drain them. Please note (as mentioned earlier) that we have $16+ billion in readily accessible reserves and tens of billions more in other assets. Without changing the PFD calculation and without touching the principle, we can use some of the interest income (earnings reserves) from the Permanent Fund. Based on arithmetic and the shortfall we’re working to shrink, we’ll need to use some of that earnings reserves going forward. Again, we can do this without wiping out our savings.  The remainder of my proposal includes the following points:

1. Economists have advised we take 3 years to close the gap to avoid a crash landing (particularly important when we’re already officially in a recession). Let’s take their advice.

2. Use some earning reserves, without changing the PFD calculation, to help close the gap.

3. Adjust (lower) the constitutional spending limit.

4. Reduce* this year and next and in the third year reduce again then reassess. (*Following this article is a list of actions we can take to further reduce the cost of state government.)

5. After reductions to better align the budget and size of government with the delivery of essential services and what we can afford – and depending on where oil prices land – if there’s still a gap, let’s consider a sales tax. A sales tax would take the least out of Alaskans’ pockets, the most from out-of-staters, and according to experts, cause the least collateral damage to the economy in both the short and long term. By including both goods and services and excluding groceries and medicines, a sales tax is actually quite fair.

So that is what I believe is the best course forward. Who’s with me?

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The following list includes some actions we can take to further reduce the cost of state government. It is not an exhaustive list, but a good starting point.

• Hire a large team of efficiency auditors to comb through department and program budgets and make objective recommendations for reductions to the finance committees over the next 3 years, so finance members aren’t just hearing from commissioners and deputy commissioners (who understandably – it’s human nature – want to protect their turf).

• Pool health insurance (state, municipalities, school districts) to bring down rates.

• Hiring freeze; any replacement would require legislative approval (worked well in Wisconsin).

• Rework state payscale, ranges, etc. of state employees. We need to look beyond current contracts and do what we can.

• Eliminate some and reduce other optional Medicaid services (some states offer none or few – and yet we’re offering all); eliminate Medicaid expansion for working age, non-disabled adults.

• Scale back Dept. of Health and Social Services to level of service provided in 2002. Rework the safety net system so it’s temporary rather than generational.

• Continue education transformation work to increase scores and reduce costs (combine admin work of small districts, utilize 2-way virtual education where possible, etc.) with simultaneous reductions or at minimum flat state funding.

• Reduce state spending per student for university down to $12k-$13K per student (next closest state is $9K per student) – we’re around $20K per student now.

Before I review the eight items on the special session call with you, I’d like to respond to those who are urging the House and Senate to work together. I’d like to propose to you how I think we can best work together and wrap up the special session.

The House is dead set on new taxes and the Senate is adamantly opposed to new taxes. Hard to find compromise there. Some in the House and some in the Senate want the Permanent Fund restructured and PFDs reduced and some only want these things if taxes are passed, while others in the House and others in the Senate don’t want any of these things. Again, tough to find compromise with this tangled web of positions.

There is, however, one thing that both chambers agree we must do – and perhaps even all 60 legislators (imagine that!): use some earnings reserves for the very first time to pay for government. That is our point of consensus. That is our point of agreement. That is the very axis where we intersect, where we all can agree. Let’s wrap up this session by together making the decision to use some earnings reserves for the first time to help fill the gap. No restructure. No PFD reduction. Just use some of the earnings reserves for the first time to help pay for state government.

So that’s my proposal on how to end the special session. Who’s with me?

Now for an overview of the eight items on the call… Unlike the regular session, we can only deal with bills for which the session was called. Below is a list of the items the governor put on the call and where we are with each one.

1. HB 57 Operating Budget – Conference Committee
The budget conference committee held a short organizational meeting, but the chair, Rep. Paul Seaton, has not reconvened the committee to reconcile the differences between the House and Senate versions of the budget. If the differences are not worked out by June 1, the governor will issue pink slips to state employees; to avoid a government shutdown, the bill will need to pass prior to July 1. Members of the committee are Rep. Seaton (Chair – lead), Rep. Foster, Rep. Pruitt, Sen. Hoffman (Chair), Sen. MacKinnon, and Sen. Olson.

2. HB 59 Mental Health Budget – Conference Committee
The bill is part of the operating budget and is also in conference committee. It is typical for this bill to be reconciled and move forward alongside the operating budget bill. Members of the committee are Rep. Seaton (Chair – lead), Rep. Foster, Rep. Pruitt, Sen. Hoffman (Chair), Sen. MacKinnon, and Sen. Olson.

3. SB 26 Permanent Fund Restructuring – Conference Committee
The conference committee members for SB 26 has been selected by both the House and Senate, but they have yet to meet. Members are Sen. MacKinnon (Chair – lead), Sen. Egan, Rep. Foster (Chair), Rep. Seaton, and Rep. Thompson.

4. HB 111 Oil Tax Credits – Headed to Conference Committee
The House and Senate agreed to end the use of refundable (cash) credits for oil and gas companies, but the House insists on increasing how much companies pay in taxes. The Senate did not agree with this portion and so this bill will be going to a conference committee. The House has selected their committee members (Rep. Tarr (Chair – lead), Rep. Josephson, and Rep. Talerico) and I anticipate the Senate doing the same soon.

5. SB 23 Capital Budget – In House Finance Committee
On May 12, the Senate passed the Capital Budget and the bill is in the House Finance Committee who had hearings two weeks ago but has not held any hearings since. The Senate created a budget that is much leaner than in the past, but there is concern that the House will add more projects and increase the budget. If this occurs, this bill could too end up in a conference committee.

6. HB 60 and SB 25 Motor Fuel Tax – In House and Senate Finance Committees
Both versions are in their respective Finance Committees and though there will likely be hearings soon, there have not been any announcements made.

7. HB 159 and SB 79 Opioid Prescriptions – In Senate Finance Committee
HB 159 passed the House last Monday and was transferred to the Senate. The Senate Finance Committee has had three hearings on SB 79 recently but since the House version is further along in the process, it will likely be the version considered by the Senate.

8. Broad Based Tax – Bill yet to be Filed
The Governor has included in the session call “An act or acts to increase an existing tax or to establish a new broad-based tax for the purpose of generating new revenues for the State.” No bill has been proposed since the special session began that fits this description but it’s possible the governor will introduce another income tax bill or a sales tax bill. The Education PFD Raffle bill by Sen. Bishop (SB78) may fit this category. It passed the Senate and is sitting in House Finance.

PLEASE NOTE: We are still under the “24 Hour Rule” which allows committee meetings to be scheduled just a day in advance.  As things progress each week, I will update this list, but to receive the most up-to-date information you can sign up for text alerts (see below) or can click on the links for each bill within this newsletter.

If you want to stay on top of the scheduling, a short text alert can keep you informed. It’s easy to sign up. Text a bill number (ex: SB1) to 559-245-2529 to enroll. You’ll receive an enrollment confirmation and instructions on how to stop receiving the alerts.