$1 billion deficit may bring about long-range plan

Posted: Sunday, October 28, 2001

Most Alaskans seem to agree that the state needs a long-range plan to balance its budget.

But nothing is likely to happen until there's a crisis, some say.

Opinion polls show general recognition of a budget problem.

But legislators aren't convinced they have the public backing yet to create major new taxes or use surplus earnings of the Alaska Permanent Fund, steps that some day almost surely will be necessary to balance the budget.

More state representatives are saying they're ready to take at least small steps toward closing the budget gap.

But key senators are adamantly against major new taxes, at least in 2002.

And even those lawmakers who favor some action soon are divided about whether it should be a comprehensive solution or an incremental approach in which politically digestible pieces of a long-range plan are taken one or two at a time.

Whatever happens in 2002, if anything, Alaskans won't be able to say they didn't have a chance to comment.

A bipartisan group of state lawmakers, called the Fiscal Policy Caucus, has been holding public meetings around the state since the summer.

Rep. Peggy Wilson, a Wrangell Republican, is hosting meetings in Southeast communities this week. Founding caucus member Bill Hudson, a Republican representative from Juneau, is having another one at 5:30 p.m. Tuesday, Nov. 6, in Centennial Hall.

Alaskans United, the group that defeated the proposed property-tax cap on last year's statewide ballot, is doing its own public education effort, backed by the Alaska Municipal League and the Alaska State Chamber of Commerce, among many groups. The Department of Revenue's Web site has a program that lets citizens do their own calculations on how to close the budget gap.

Legislators already are deep in discussion about a long-range plan. Three committees have met in the past 10 days to talk about aspects of it, and the House Republican Caucus held a priority-setting retreat Friday and Saturday.

Past and future

But there's political baggage.

A vague plan by legislators in 1999 to use surplus earnings of the permanent fund for government operations was rejected by more than 83 percent of voters in a statewide advisory question.

Although later polling showed that the message from voters was more complex than merely "don't touch my dividend," the fact remains that when it comes to the budget deficit, state officials have cried wolf before.

An unexpected resurgence in oil prices, along with budget cuts and higher-than-projected settlements in litigation against the oil industry, postponed what was expected to be a crisis by now. Instead of depleting the Constitutional Budget Reserve - a savings account that has been used to plug budget gaps - the state actually realized a small budget surplus in the fiscal year that ended June 30, 2001.

Advocates of a long-range plan might have trouble convincing the public that the wolf is still at the door.

"We've been hearing gloom and doom statements for 15 years," said Anchorage pollster Ivan Moore. "There will come a day, though, when there is no bailout."

The Constitutional Budget Reserve, about $2.85 billion now, will be drawn down by a projected $631 million this year. No more major settlements are pending to boost it back up, according to Larry Persily, deputy commissioner of revenue.

Even if state general fund spending doesn't increase and projected oil prices hold steady, the reserve fund will be gone in the fall of 2005, Persily said.

Then the state will have a $1 billion hole in its budget.

That's nearly the payout for the permanent fund dividend. Or the total spent by the state each year on public schools and the University of Alaska. It would take a 14 percent state sales tax to balance the budget.

Arliss Sturgulewski of Anchorage, a former Republican legislator and gubernatorial candidate, said depletion of the Constitutional Budget Reserve would be "an arrow aimed right at the heart of the permanent fund."

"Some of my colleagues would like to grit their teeth and spend out of the Constitutional Budget Reserve as long as they're on the watch," Rep. Hudson said. If that happens, "whoever's left standing is going to have to make some terrible, terrible decisions that probably will cost people their permanent fund dividends," he said.

That would be, said former House Speaker Mike Bradner, "the most embarrassing situation in the United States for a major government."

Making the case

Those who want a long-range plan say they're trying not to repeat the mistakes of 1999. Then legislators went out with a plan without really engaging the public first.

Instead, "we need the people talking to government about what we need," said House Speaker Brian Porter, an Anchorage Republican.

Another new strategy is to stress who gets the services, not who delivers them.

In 1999, "they were talking about funding government," said Alaskans United Chairman Ernie Hall of Anchorage. "You've got to talk about funding public service."

Moore, the pollster, also said that the public responds better if the message is that acting now will be cheaper than acting later. Just to say that the Constitutional Budget Reserve is running out doesn't cut it, he said.

For fear of polarizing the public, Alaskans United won't endorse any specific long-range plan, Hall said. The group's mission, rather, is to convince Alaskans that something has to be done.

"We're trying to maybe break some new ground on civic involvement," said Kevin Ritchie, executive director of the Alaska Municipal League.

"What matters right now is not what's in the plan but the public's acceptance of the need for a plan," said Lt. Gov. Fran Ulmer, now a Democratic candidate for governor. "I don't think we're there yet."

Public sentiment on a long-range plan is ambiguous.

Moore surveyed 400 "super-voters" for Alaskans United in August. He found that 52 percent of respondents considered the state "off-track from a fiscal standpoint." Super voters are those who vote regularly.

Four out of five said there is some urgency to implement a long-range plan. And 72 percent said they would be likely to support a fiscal plan that included some combination of income taxes, alcohol and gas tax increases, and use of permanent fund earnings.

The terrorist attacks following the poll might have strengthened those numbers, Moore said. "The events of the past month have reinforced the perception of the need for maintaining funding for public safety, police and fire, things like that."

But Senate Finance Co-Chairman Dave Donley, an Anchorage Republican, said that Moore's poll doesn't prove anything.

"The public's not going to go for that; I don't care what they think their numbers show," Donley said. "It's easy to get people to say they support some kind of plan."

Gerald McBeath, political science professor at the University of Alaska Fairbanks, agrees that the poll numbers probably gloss over a deep resistance to most specific taxes.

"Nothing will happen, in my view, until we're much closer to the depletion of the Constitutional Budget Reserve," McBeath said.

Supporting that notion is a comment e-mailed to Hudson, strongly objecting to an income tax: "May I suggest we cut, cut, cut government spending. ... I am sick and tired of you politicians trying to figure out ways to waste my hard-earned money. I work too hard to have it spent on sick druggies and alcoholics, child abusers, schools that don't teach ... "

2002 or 2003?

Donley has proposed two constitutional amendments aimed at restraining spending. One would cap the state general fund at about $3.1 billion, compared to $2.4 billion this year, and put limits on annual increases. The other would overturn a court ruling requiring a three-quarters vote of the Legislature to tap the Constitutional Budget Reserve. Donley says the Democratic minority in the Legislature was able to use its leverage over the Constitutional Budget Reserve to ratchet spending up by an additional $150 million this year.

Donley also has proposed seven changes in law that would squeeze various areas of state spending. But Hudson said that they would yield only about $40 million in savings and in a couple of cases would require contributions from cash-strapped Bush villages.

"I think you have to go forward with the fiscal restraint before you consider major new taxes," Donley said, although he favors a "reasonable" alcohol tax increase. "It's too easy to start taxing people and just start spending the money. ... You've got to fix the foundation before you can build."

In recent news releases, Donley has asserted that "most everyone agrees" with him on that, including former Gov. Jay Hammond, although Hammond in April recommended a special session to pass an income tax. Donley noted that Hammond has talked about "triggering" new revenue only when the Constitutional Budget Reserve drops to a dangerous level. Such a trigger would serve as a disincentive for excessive spending, Donley said.

The support of Hammond, governor from 1974 to 1982, can be powerful. He is by far the most respected Alaskan on fiscal matters, according to pollster Moore.

Donley's constitutional amendments were passed by the Senate this year. If approved by the House in the upcoming session, they would go on the election ballot in 2002.

But Sen. Alan Austerman of Kodiak, the only Republican senator who has been active in the Fiscal Policy Caucus, doesn't want to wait for the election. He said there never will be a day when the public agrees to new taxes or a lower dividend.

"We're elected to be statesmen," Austerman said, vowing to push for getting a long-range plan to the Senate floor for a vote in 2002.

"You will never get the permission of the people to reduce dividends or increase taxes," said Rep. John Davies, a Fairbanks Democrat who is co-chairman of the Fiscal Policy Caucus. "The place where the public should connect is on whether to re-elect those of us who make those decisions."

Ritchie of the Alaska Municipal League remains optimistic about public sentiment. He noted that early polls showed two of three voters favoring the tax cap, which ended up losing 3-1. The tide changed when Alaskans United made the connection between taxes and services that people want.

So far, it's unclear how election-year pressure might affect the deliberations.

Although the 2002 gubernatorial race recently got off to a start, the candidates aren't promoting specific budget fixes yet. The consensus frontrunner, U.S. Sen. Frank Murkowski, said it's too early to be laying out detailed plans.

In the meantime, the post-census redistricting is complicating the legislative outlook. Under the plan adopted by the state redistricting board, which has been appealed to court, many legislators could end up with a lot of new constituents. In a number of cases, Republican incumbents might run against each other.

"It will be hard during this particular election year that's coming up," said Pam La Bolle, president of the Alaska State Chamber of Commerce. "It's going to be hard to get the focus and the energy to do this (long-range) plan."

"These are tough decisions under any circumstances in the best of political bodies," said Bradner.

While waiting for a new governor and new legislature might seem easiest, the clock is ticking.

Delaying action until 2003 or later drives up the cost of the eventual solution, Davies noted. Each withdrawal from the Constitutional Budget Reserve, along with the lost investment income, is money the state will have to make up later.

If a new tax was approved by the Legislature in spring 2003, Persily said, "you'd really have to hustle to get something into place that fall to start Jan. 1" of 2004 - less than two years before the Constitutional Budget Reserve is gone. Depending on how complicated the tax was, "I think it could easily be a year" to implement, Persily said.

Delaying action until 2003 might work "if (oil) prices hold up, if there are no other problems," he said. "But it depends on whether you want to play chicken with public services and the budget."

The nature of the proposed solution could affect the timing.

Gov. Tony Knowles has said he would want a vote of the people for any change to the dividend program. At times he has been interpreted to support such a vote for any use of surplus earnings of the permanent fund, as well.

Spokesman Bob King said it's too soon to say whether Knowles would call for such a vote in November 2002. That, of course, would delay implementation of a budget fix until at least 2003, when Knowles would be out of office.

Universal or piecemeal?

Speaker Porter said he hoped to emerge from this weekend's caucus retreat with a better sense of whether House Republicans support a comprehensive fiscal plan or a step-by-step approach.

The Fiscal Policy Caucus is expected to have its own retreat in a month to tackle the same question.

Last year, separate pieces of a long-range plan faced opposition while advancing on their own.

A proposed "dime a drink" increase in the alcohol tax drew fire from liquor industry lobbyists, who said it was unfair to single them out. Hammond said they "descended like cockroaches on Juneau."

But the equity argument was raised again Thursday by Juneau bar owner Judy McDonald in testimony before the House Finance Committee.

"I understand that the state needs to balance their budget, but I think they need to look at all sources, not just the liquor industry," said McDonald, who called the potential tax "absolutely devastating."

During the legislative session, House Republicans who are members of the Fiscal Policy Caucus didn't go to the wall to force the bill out of the Finance Committee, where Co-Chairman Bill Williams of Saxman was bottling it up.

Rep. Lisa Murkowski, the Anchorage Republican who is sponsoring the alcohol tax increase, said that a variety of polls recently have indicated support for it. She said she'll talk about the $34 million tax increase "in concert with the whole plan," even if everything else isn't implemented simultaneously.

A symbolic setback for the piecemeal approach last session came with a bill to put more money from newer oilfields into the general fund instead of the permanent fund. That's projected to yield $333 million over 10 years, while reducing dividends a total of just $90 per recipient from 2006 through 2011.

Davies and some other Democratic members of the Fiscal Policy Caucus voted no, saying the permanent fund is the wrong place to start. The bill passed the House, anyway.

Bill sponsor Norm Rokeberg, an Anchorage Republican, said the Democratic vote was "stupid."

"I don't know if there ever will be a 'rest of the plan,' " Rokeberg said.

"I think communications within our caucus broke down a little bit at that point," Davies said.

But Davies wants a comprehensive package because otherwise he fears that the easiest budget-balancing measures will be taken first, leaving hard choices to stand alone later.

Knowles hasn't decided yet if he'll propose a comprehensive package, as he has before, or just back individual elements of a plan, said King.

In 1999, Knowles proposed an income tax averaging 7 percent and the transfer of $4 billion of permanent fund earnings to the Constitutional Budget Reserve. The plan went down in flames.

Bradner, the former speaker, recommended passing what's easy first. "It's how politicians gain their confidence."

A new day?

Some people think an entirely new legislative process is required to come up with a long-range plan.

House Minority Leader Ethan Berkowitz, an Anchorage Democrat, said he's proposing to Speaker Porter that the 40-member House function as one caucus -- that is, discuss priorities openly, as a single body. In exchange for that, the minority would promise to support the next state budget bill and not use votes for the Constitutional Budget Reserve as leverage to gain concessions, he said.

"It's time to try something new," Berkowitz said. "It's time to rewrite the rules."

After talking with other Republicans, Porter said he needs to hear more details from Berkowitz. "There wasn't great enthusiasm, but there were a few asking, 'What is he proposing?' "

If the current party caucuses remain in place, as seems likely, the question might be whether the Fiscal Policy Caucus will use its potential clout.

There are about a dozen members of the 28-member majority caucus in the House who are members of the Fiscal Policy Caucus. With most of the 12 minority Democrats also active, the bipartisan group constitutes a majority of the House. The question might be whether the Republican members, who are a minority within their party's caucus, will join with Democrats to pressure the House leadership.

"I think the moderates will insist on a place in the sun next time around," Bradner said.

"I don't know if it's bad news or good news, but I think there's a range of opinion in both caucuses," Porter said. Personally, he said he wants to see movement on a long-range plan next year.

Rep. Ken Lancaster, a Soldotna Republican and member of the Fiscal Policy Caucus, said that he might be willing to "roll" committee chairmen who stand in the way of new revenue measures.

Hammond says it's essential.

"My message to the Legislature is you're not going to do a thing until you yank bills out of committee. All these special interests have to have in their pocket is one powerful committee chairman, and they're home free."

Hammond encourages a secret ballot on discharging bills from committee, so that chairmen can't take retribution against individuals.

Hudson doesn't think it'll be necessary, at least in the House, to force committee chairmen to allow votes on bills.

"I believe there is a desire to do something that is right," he said.

But then there's still the House-Senate split to overcome.

"I have always described the Senate as a place where bad ideas are born and good ideas go to die," Berkowitz said.

Meanwhile, Donley likens the Fiscal Policy Caucus approach to the doomed plan of Sept. 14, 1999.

As a result, the Legislature appears to be a long way from consensus.

Concluded Hall of Alaskans United: "It's going to be an ugly legislative session."

Bill McAllister can be reached at billm@juneauempire.com.

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