1 Bradners’ © Alaska Legislative Digest - Special Reports on Alaska policy Publishers Tim and Mike Bradner, [email protected], Tim, (907) 440-6068 or Mike: (907) 242-6572 Digest No. 21/19 - May 5,2019 Fiscal plan? At best were just patching! Quiet ending, calm before the storm? By Tim Bradner © Copyright: The Alaska Legislative Digest and the Alaska Economic Report are copyright We’re about a week and a half away from the Legislature’s required 120-day adjournment, publications. Please call (907) 440-6068 for permissions. although there is a provision for a 10-day extension. While things could still get rocky it’s also possible this session may just end quietly, end with some of the big issues left to a special session or sessions. These could include efforts to override vetoes, fix legislation, crime bills, and constitutional amendments. The current ending may be the quiet before a big storm. Here’s where things stand: The House and Senate have both passed their FY 2020 operating - Continued on page 3 budgets, both rejecting the governor’s big cuts and both spending about the same in-state funds – $4.31 billion for the House and $4.28 billion for the Senate. Those compare with $3.59 billion proposed by the governor and $4.56 billion in the current FY 2019 operating budget. There are some differences between the House and Senate plans. The House cut local school debt assistance by 50 percent while the Senate kept it at 100 percent. Dunleavy proposes to completely cut it. The House retained the state ferry system at essentially current levels while the Senate cut the system, but left enough limited winter services. The governor proposes tying up the ferries, with no winter service. - Continued on next page Put something together and see what Dunleavy does? We expect the budget conference committee to quickly come to agreement, though we can’t predict how school debt support and ferry service will play out, nor the issue of the legality of forward funding of schools. Senate Finance Cochair Sen. Bert Stedman, R-Sitka, is a bit over a barrel on the ferry system because his Southeast district really needs some kind of winter service. Sen. Gary Stevens, R-Kodiak, is in the same boat, not only for Kodiak but also Cordova, a coastal community with no roads, and for service in the Aleutians. Stedman is trying to work something out with Dunleavy for his limited winter service, but we’ll see. - Continued on next page © Copyright: The Alaska Legislative Digest and the Alaska Economic Report are copyright publications. Please call (907) 440-6068 for permissions. 2 Driving up local taxes . - Continued from previous age As for school debt support, if there is any cut the cost simply passes to municipalities, who are legally obligated to pay for the bonds. It means local property taxes will go up, and that’s what municipalities are already telling their taxpayers. The governor promised no taxes, but apparently he meant just state taxes. In fact, his actions could also put some communities in very serious fiscal straits. We might add that school debt support is a covenant dating back to 1970 - that’s 48 years. A hole in governor’s fiscal plan Meanwhile it is clear that Dunleavy will not achieve major parts of his financial plan. His proposal to take $400 million-plus of petroleum property tax revenue from the North Slope Borough, Fairbanks North Star Borough, City of Valdez and Kenai Borough is simply a nonstarter. In committees holding the governor’s bills that do that – House Resources and Senate Community and Regional Affairs – the chairs have said they will not even hold a hearing on the proposal. The governor will also come up short of his proposed savings from Medicaid, at least for this year. The Department of Health and Social Services is hoping to trim $100 million through internal actions and the House and Senate have agreed. There’s skepticism on Mark Foster: How are out schools doing whether the savings can actually be made, so don’t be surprised if there if a Medicaid supplemental appropriation next year. The bigger savings on Medicaid will come if agreements for major program changes can be reached with the federal government. That’s possible – talks are now underway. They are unlikely to significantly affect the FY 2020 budget. Those changes could be controversial, which means litigation. Medicaid cuts can also have consequences in loss of providers Could governor impound education money? The governor’s big whack of K-12 funding won’t happen in FY 2020 either, mainly because the Legislature “forward-funded” the billion dollar-plus school foundation program last year. The governor could just try to refuse to expend the money, of course, Alaska Legislative Digest No. 35/18 but that would cause more litigation. Dunleavy alleges the forward funding is unconstitutional, but there are a lot of previous funding examples that suggest otherwise. Nevertheless, litigation could create a lot of chaos. - Continued on next page Page 2 Alaska Legislative Digest No. 2119 - Continued on next page 3 School litigation on impoundment - been there before! - Continued from previous page There is litigation underway already regarding the governor withholding the $20 million in one-time funding enacted for the current year. We can’t quite see the rationale of this action except as a pique on the governor’s part. There is legal precedent here. In 1987 oil prices crashed just after the beginning of the new budget year in July. Citing a budget emergency, which it was, Gov. Sheffield acted to impound a portion of K-12 school funds for that year. However, emergency doesn’t necessarily make something legal. The Fairbanks North Star Borough filed suit. This case twice reached the Alaska Supreme Court and in both instances the Court affirmed the Superior Court's decision holding that the governor’s action was an unconstitutional action. The Court concluded the statute from which the state alleged authority permitted the governor so much discretion as to amount to an unconstitutional delegation of legislative power to the executive branch. University of Alaska budget could be a veto target The University of Alaska budget is one place where the governor can wield his axe (through vetoes) without complications. The House and Senate made only minor reductions to the university while the governor proposed a huge cut. The problem is the University gets what is essentially a “single line item” appropriation. The governor doesn’t have to take responsibility for program cuts he made. The governor can cut the single appropriation and walk away and say: “your problem.” The downside here is that we are trashing our state university system with a national reputation in research. What about the PFD? So, how about the Permanent Fund dividend, or PFD? This is the contentious issue as the 2019 session winds down. A quick recap: The governor promised a $3,000 PFD in his campaign and feels compelled to deliver it. To get it, with the available revenues, spending must be cut $1.6 billion, one fourth of the state portion of the operating budget. However, many legislators have argued that a more modest PFD, like $1,200 to $1,600, would leave enough money to fund the budget. - Continued on next page Page 3 Alaska Legislative Digest No. 21/19 4 The Senate’s big surprise was the to $3,000 pfd - Continued from previous page In a big surprise, the Senate has opted for a $3,000 PFD, giving the governor a win, but also keeping the budget at higher levels. To accomplish this the draw from the Permanent Fund’s earnings reserve will have to be greater than the 5.25 percent. If the full budget is maintained, which it may not be, the draw would be increased to between 6.3 percent and 6.5 percent. This would not speak well for Alaska’s ability to manage its financial affairs. Last year we adopted Senate Bill 26, which set the Permanent Fund earnings draw at a cap of 5.25 percent, but hopefully dropping to 5 percent after 2021, to not overdraw and keep the Fund sustainable. That we’re exceeding this limit one year after enacting SB 26 just to pay a large PFD doesn’t make us look very good. How would vetoes be made? The governor may yet wield his line item budget veto budget axe. It’s not clear what he can veto to really gain much other than hitting funding from the university, ferry system, school debt reimbursement, all things he can do without statute changes. He could always Reed Stoops try to impound money regardless of existing statutes, but this would invite lawsuits. Stoops & Associates 350 North Franklin #2 There could also be “unallocated” reductions across agencies but that just leaves Juneau, Ak -99801 commissioners stuck with having to do the dirty work, plus there would be lawsuits. We (907) 463-3223 think the courts, if they become involved, may have a dubious view of the governor whacking a constitutional obligation like education just to pay a fat PFD. Kent Dawson Kent Dawson Company Strength of the Mat-Su Box 20790 What happened within the Senate Finance Committee with the $3,000 PFD showed the Juneau, Ak - 99801 strength of the Mat-Su Republican delegation, Sens. Mike Shower and David Wilson who (907) 351-2525 teamed up with three Democrats, Sens. Bill Wielechowski, Lyman Hoffman and Donny Olson, all in support of the larger dividend. Constitutional Amendment Watch! Finance Cochair Sen.