Governor calls for Senate action on state's fiscal gap

Posted: Sunday, May 05, 2002

Gov. Tony Knowles said Saturday that he "could imagine" calling a special legislative session on the state's $1 billion fiscal gap, if the Senate doesn't act by the May 14 adjournment of the regular session.

"If it would be productive," he added. "If it would be necessary. If there was the support. You have to have legislative support for those kinds of actions."

Knowles, in a news conference two days after historic House action on a revenue package of about $900 million, said the ball is now in the court of the Senate, which is controlled by conservative Republicans.

The Democratic governor pointed to three revenue packages open to the Senate "that all represent responsible approaches":

• His own package of a $350 million income tax, based on 20 percent of federal income tax liability, a $30 cruise ship head tax that would raise about $20 million, and a "dime-a-drink" increase in the alcohol excise tax, for about $30 million.

• The package the governor negotiated with House Republicans and Democrats, including a unique and regressive income tax for $255 million, a total of 10 cents per drink in the alcohol tax, which would raise $20 million, and $250 million from the "excess" earnings of the permanent fund.

• The package the House actually passed, including the negotiated income tax and alcohol tax but with about $300 million in permanent fund earnings next year, and more than twice that much in succeeding years.

Knowles acknowledged being surprised by the amount of permanent fund earnings that the House approved for general government purposes and repeated his long-held stance that there should be a public vote on such an unprecedented incursion into the fund.

But he wouldn't be pinned down on whether the permanent fund legislation would be vetoed if it came to his desk in its current form.

Senate President Rick Halford, a Chugiak Republican who opposes any use of the earnings, said Friday that a veto would be likely.

"That's great. I mean, he is very good," Knowles said, with a chuckle. "He has just immediately diverted it to well, what's the governor doing?' See? What I'm saying is, look, the important question is what are they going to do to contribute to resolving the issue. ...

"The House, I believe, has fulfilled their responsibility. I have acted. The House has acted."

Halford and Senate Finance Co-Chairman Pete Kelly, a Fairbanks Republican, said that past experience shows that some politicians tend to jump the gun when there are low revenue projections. Halford showed reporters a 1987 newspaper article in which legislative leaders and Gov. Steve Cowper were advocating the use of permanent fund earnings to prop up the state budget. It didn't happen, and the fund has grown substantially since then, he noted.

In 1999, Knowles and the Legislature decided on a statewide advisory vote in which Alaskans were asked if some permanent fund earnings could be used for government. About 83 percent voted no. Soon after, oil prices rebounded and the size of the fiscal gap shrank, without any new revenue measures.

"You have some history that says we have gone through this before," Kelly said.

Knowles said there's a clear difference between 1999 and now: Then, oil prices were at $9 a barrel, about half of their historical average. Now they're at about $25, or about 50 percent higher than the historical average. That suggests that oil won't bail out the state by late 2004, when budget reserves are projected to be gone.

"That was then; this is now," Knowles said.

Halford said there might be votes on the four bills passed by the House.

"I have never been worried about voting on things on the floor, so that's certainly not a problem," he said.

But Halford called the income tax bill "kind of amazing" because the wealthiest Alaskans would pay the smallest percentage of adjusted gross income, 0.73 percent, while the middle class would pay the most, more than 2 percent.

And he said the use of permanent fund earnings would damage the fund's future because the Legislature no longer would roll earnings back into the principal.

The bill ultimately calls for a 5 percent payout of the average market value of the fund, with half going to government and half going to the dividend program, about $650 million each in fiscal year 2004. Dividends would drop from an estimated $1,540 this year to about $1,000 in 2003, said Larry Persily, deputy commissioner of revenue.

"Those who say that maintaining the permanent fund is best done by raiding it a little now so you don't have to raid a lot later, I think, are sadly in error," Halford said. "Those are many of the people who voted against the deposits (into the fund principal) and who have felt the needs of the present are more important than the needs of the future for a long time."

Republican senators have emphasized structural changes intended to tighten the screws on future state spending.

The Senate, on party-line votes, has approved constitutional amendments to cap most nonfederal spending at 2 percent a year, to allow the Legislature to impose a hiring freeze on the executive branch, to allow the Legislature to access budget reserves with a simple majority vote, and to require the administration to submit budget priorities, so that low-priority functions are clearly identified when it comes time to make cuts.

"It may not do anything immediately for the fiscal gap, but those are the kinds of measures that are truly the long-range fiscal plan, which is to change the structure of how we do business down here," Kelly said.

The House has yet to pass any of the amendments, although the hiring freeze and budget priorities were moved out of the Judiciary Committee on Friday. If approved by the House, the amendments would be placed on the November general election ballot.

Bill McAllister can be reached at

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