Legislature takes big step in closing fiscal gap

As the state Legislature moves with agonizing slowness toward a major restructuring of state finances and fiscal policy, business leaders have pointed out that the uncertainty creates a hesitation to invest. Some sectors of the economy are relatively stable but the instability of the state’s finances affects them as well.

The Legislature adjourned its 2018 session May 12 and took two big steps in resolving the state’s structural scal gap, a problem that has chilled business investment. One step was agreeing to tap some of the $65 billion Permanent Fund’s earnings to help fund the state budget (this is a rst); the second was in doing it in a structured way with a percent-of-market-value annual draw similar to that used by large endowments. The percentage for three years is 5.25 percent falling to 5 percent, but the actual draw is averaged over the prior ve years of the Fund’s value. That means the actual draw for the FY 2019 state budget will be lower, about 4.5 percent.

Significantly, the procedure for annual withdrawals is now set out in a statute. This is important for the Permanent Fund trustees in setting investment policies for the Fund, and for financial rating agencies. While the Legislature can always ignore a statute, and that has happened, this issue is high profile and there will be pressure to follow the rule.

The withdrawal this year will bring about $2.8 billion into the state General Fund. About $1 billion of this is needed to fund the annual Permanent Fund dividends to citizens (set this year at $1,600), so money available for the budget totals about $1.8 billion. The state’s normal revenues, mostly from oil, are estimated at $2.2 billion. Combined, these total $4 billion. This still leaves a $700 million de cit. The $700 million de cit will be covered by funds remaining in the Constitutional Budget Reserve, although this fund is being depleted. Within the next two to three years a major new revenue source, most likely a broad-based tax, will be needed.

An interesting development is that the Legislature backed away from a specific guideline in the statue (enacted by Senate Bill 26) to allocate the Permanent Fund draw between the budget and dividend. Previously allocations of 70 percent to 75 percent for the budget and 25 percent to 30 percent for the dividend were considered. Now the Legislature makes the allocation annually. The dynamic this sets up is that a restraining in fluence is built in against budget increases because these would diminish the dividend. Support for the dividend cuts across partisan lines, so this could have unusual effects on normal political dynamics in the Legislature. However, it’s also important to note that powerful forces are pressing state and local budgets upward, mainly the steady increase of health care costs that are felt all through the system.