Panel eyes perma fund earnings

Hudson urges action on new state revenues

Posted: Sunday, February 24, 2002

A House committee on Saturday considered three different ways to use permanent fund earnings for government operations.

In contrast to a 83 percent no vote in September 1999, when the Legislature asked voters for permission to tap fund earnings, only two members of the public testified against the idea.

Joe Sonneman of Juneau opposed reducing the size of the permanent fund dividend because he said it would have the most impact on low-income people. Three others favored some use of earnings as part of a long-range fiscal plan, including Mike Sigler of Juneau, who said education funding needs a boost.

But the future of permanent fund earnings as a government revenue source is unclear.

House State Affairs Chairman John Coghill, who scheduled the hearing, said he's still reluctant to move forward with any of the proposals until he's satisfied that measures to restrain spending have political momentum. There's been far more talk about new taxes and using fund earnings than there has been about controlling the growth of state government, said Coghill, a North Pole Republican.

Meanwhile, Rep. Bill Hudson, a Juneau Republican, is pushing for an annual payout of 5 percent of the five-year average market value of the permanent fund. With fund earnings projected at an average of 8.25 percent a year, the 5 percent payout would constitute automatic inflation-proofing of the entire fund, not just the principal.

Then Hudson proposes to split the payout 50-50 between dividends and government, which would mean about $633 million for each in 2003. Dividends would drop to about $1,000 per resident, down from the projected level of $1,560.

"This is not a pleasant thing to recommend to the people of Alaska," he said. "But it is something in my opinion that's extremely responsible."

Hudson urged Coghill not to sit on the legislation just because of his concerns about whether there would be budget cuts or caps also.

"The budget-development process is a function outside your committee," said Hudson, a member of the House Finance Committee. "I would plead with you not to necessarily hold up what I think are some essential elements. ... I think there is going to be strong support for significant holding-the-line; I won't call it reductions."

"I understand the purview of the finance committee," Coghill replied. "I also am very well aware that, as a chairman, this is my only chance to have a bite of this apple."

After the hearing, Coghill said he would prefer to see a proposed constitutional cap on spending pass the full House before he allows committee votes on bills that raise taxes or use permanent fund earnings.

"If it gets hung up somewhere, I'm going to get hung up," he said of the spending cap.

The bill, which limits annual spending increases to 2 percent unless there is a supermajority vote, is awaiting action in the House Finance Committee. It passed the Senate in a different form last year.

Coghill said he hopes to get some assurances from the House Republican caucus Monday that holding down government spending is a priority. He said it's still possible that the House could vote by mid-March on new revenue, handing off the issue to the more conservative Senate.

"I'm not bluffing, though," Coghill added. "If I feel I've been had, I'm going to be very difficult to deal with."

There also are bills for income and sales taxes pending in Coghill's committee.

One is Hudson's bill to tax 2.25 percent of adjusted gross income. He unveiled an amendment Saturday that would reduce or eliminate the tax if there's growth in the Constitutional Budget Reserve, which has been used to offset ongoing deficits in the general fund.

By 2004, the income-tax bill would raise about $285 million a year. With half of the 5-percent permanent fund payout, a $25 cruise ship head tax and a dime-a-drink alcohol tax increase, about $962 million could be applied against a fiscal gap of about $1.2 billion.

Assuming just 1 percent budget growth, that revenue package would extend the life of the CBR by several years, keeping it above $1 billion through 2009, according to an analysis. At least that much in reserves is considered necessary to cushion the state against a sudden downturn in the price of oil, which provides about 80 percent of general fund revenue.

With no action, the CBR is projected to become empty in the second half of 2004.

In that event, the Legislature will have to tap the earnings reserve account of the permanent fund, with the ultimate result that the dividend program will come to an end, said Rep. Jim Whitaker, a Fairbanks Republican.

"Those who stand in front of us and say by doing nothing we are saving the permanent fund dividend are simply wrong," Whitaker said. "I'm a conservative Republican. It is a painful experience for me to have to say that the way to go in the state of Alaska is to tax ourselves."

Whitaker has bills to take $200 million annually from the earnings reserve account for government operations and to impose a 6 percent seasonal sales tax.

Rep. Drew Scalzi, a Homer Republican, is sponsoring a bill intended to link the permanent fund dividend with the need for new revenue in the public's mind.

When the CBR drops below $1.5 billion, Scalzi's bill calls for it to be brought back up through a transfer of fund earnings that otherwise would be used for dividends. Reduced dividend checks would be the direct result of state revenue shortfalls, forcing the public to sort out its priorities and see the connections between economic development, state spending and their own income, he said.

Coghill said the State Affairs Committee will consider some combination of the various proposals on Tuesday, but he's not promising a vote then.

Bill McAllister can be reached at

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