SB 134-FUNDING SHORTFALL POLICY  9:57:39 AM CHAIR MCGUIRE announced the consideration of SB 134.   SENATOR GARY WILKEN, Alaska State Legislature, presented SB 134 as sponsor. He said the last Alaska Oil and Gas Report announced that anxiety mounts as production declines. The oil producers told the legislature that production was declining by six percent, and the Department of Revenue (DOR) said it was declining by 0.9 percent. Either way, there needs to be a fiscal bridge to the gasline, he said. The desire for a long-range fiscal plan is a common refrain. He suggested thinking beyond one year. Senator Dyson has a bill asking the governor to forecast ahead 15 years. 10:00:25 AM SENATOR WILKEN said his bill starts the discussion. SB 134 is policy, not law. The legislature could put it in and take it out later. He said, "We would put in the Executive Budget Act two statements: It's the policy of the state to formulate a responsible, sustainable budget. It is the policy that amounts necessary to cover projected shortfalls during a fiscal year be appropriated equally from the Constitutional Budget Reserve (CBR) and the Earnings Reserve Account of the permanent fund. It would be used only when needed, he added. He pointed to a graph of expenditures and revenue. He assumes an increase in spending of three percent, and he showed the fall revenue forecast. He thanked staff from the permanent fund division, legislative finance, and the Office of Management and Budget for helping with the data and graphs. 10:04:10 AM CHAIR MCGUIRE noted a 2006 and 2007 spike in revenues and asked how they figure into the "little pots of money that we have set aside for savings." SENATOR WILKEN said, "That would be what's coming into our checkbook." He said, "We write checks out of our check book, which is filled up by the general fund." He said checks written for permanent fund dividends are an expense. The legislature saved $650 million last year and "people on the campaign were talking about how we spent everything…we wrote a check and put it in a saving account." CHAIR MCGUIRE asked if that $650 million savings is absorbed into the red input line. 10:05:35 AM SENATOR WILKEN said yes, "we spend our savings." Alaska is not going to be saving next year. Last year there was a $10.2 billion budget. Three components are 88 percent of the budget. In 2004, the two numbers were essentially the same. Federal funds are falling away, and 85 percent of what the state spends is from oil and gas. Things can change quickly. The next graph is titled Fy07 General Fund Budget. The budget of the governor is balanced at $52 per barrel. Today it is $62.64. He noted that three or four years the state was "rolling in clover" when oil hit $30 per barrel. If the price were $30 today, [the state would have a deficit of] $1.8 billion. 10:08:47 AM SENATOR WILKEN showed the effect of the escalator in the PPT [profit-based petroleum production tax of 2006]. SENATOR BUNDE said next year the chart will be out of date because production will be down. The opportunity for change will magnify as production declines. SENATOR WILKEN said there are three big variables: expenses, oil production, and oil price. "We start to fall away next year or the year after." He said to expect gas revenue in 2016, and Alaska needs a bridge until then. 10:11:51 AM SENATOR WILKEN said the state has used the cushion. He showed the CBR balance and the draws for FY94 to FY07. The CBR has been used four times. He said he forgot that Alaska drew $884 million out of the CBR in 2002, almost $500 million the next year, and then about $46 million for the last four years. The average draw has been $275 million for the 14 years. He said the CBR peters out in 2013 or 2014, so there will be no more cushion. Cutting government sounded easy before he arrived at the capitol. If the state cut out public radio and television, as discussed by Senator Bunde, and it cut out state parks, libraries, museums and the one percent for arts, the total savings would be $17 million. It is not worth the emails that he would get. The state needs to save up to hundreds of millions, so if it got rid of road maintenance, the troopers, the marine highway, and the universities, it would save $430 million, "but we wouldn't have any troopers but we wouldn't need them because we don't have any roads to drive on and we're not educating people so…." 10:15:14 AM SENATOR WILKEN said his intent is to show that the state is not going to cut its way out of the deficits. He spoke of other options, like income tax, alcohol tax, corporate income tax and sales tax. "Or we can start to talk about the earnings of the permanent fund, which in January 31, 2007 had $4.7 billion sitting in it." He suggests filling the gap with contributions from the CBR and the earnings reserve account. Given a three per cent growth, the bridge is built from equal draws. The earnings reserve of the permanent fund is available, always has been, by a vote of 21 in the House and 11 in the Senate. 10:17:43 AM SENATOR BUNDE said the state already spends the earnings, including $1.7 billion for the dividend, the hold harmless provisions, and several other things. The precedent is set. The pie chart had $1.7 billion revenue from the permanent fund. SENATOR WILKEN said hold harmless costs about $34 million and it costs money to make money, so "we do spend the earnings." He warned that everyone will say that the legislature can't be trusted and it will steal the fund. So he asked: "How much of the corpus has the legislature been responsible for?" The legislature should be proud that it has put in 65 percent of it. It also inflation proofed it with $10 billion. The legislature has certainly been a good steward. "We can manage getting at the permanent fund," he said. He warned that opponents will accuse them of robbing the fund, "and the bumper stickers roll out." 10:20:50 AM SENATOR WILKEN said the principle is protected by the constitution, and it will be generations before Alaskans go to the ballot box and vote to spend the permanent fund; it's just not going to happen. The earnings brought to the earnings reserve account was $4.7 billion by the end of January. This year, $878 million will be used for dividends, $860 million for inflation proofing, and $2.9 billion will be left and available. The crown jewels of a fiscal plan are the CBR and the earnings reserve account; "I just can't say enough about that sentence." It is the only legislature in America deciding how to manage $40 billion for 665,000 residents. He said some people won't support the idea because there is no income tax and 43 states have one. "But no other state has $40 billion." Every minute of every hour of every day there are millions of decisions made on Wall Street about people investing money, and each one is to create wealth. Alaska is part of that game. People invest in corporate America, real estate, bonds, and the last six months of 2006, Alaska's investments were earning $734,000 per hour, and "we didn't lift a finger … we're putting it in faster than we can take it out." That's the plan. It is a whole other industry that creates wealth for the people of Alaska. It is all about taking a one- time resource to create wealth for the future. But the next question will be: "What about my check?" 10:25:04 AM SENATOR WILKEN showed ten years ahead. "Let's just say we filled every fiscal gap…let's call it $250 million." The effect on each PFD check would be nothing the first year, $2.00 the next year, $20.00 in five years, and $89.00 in 10 years. "You make a good investment; the money just keeps showing up." SENATOR STEVENS asked if the check decrease is cumulative. SENATOR WILKEN said that is the effect of the draw of $250 million every year for 10 years. In 10 years, each PFD check will be $2,250 instead of $2,339. With the draw, the accumulated ten checks would be $19,073 instead of $19,409-a difference of $336 over the ten years. He showed a graph with the draw and without the draw. The permanent fund stays awfully healthy, and after 10 years it will be $4.5 billion less than $60 billion. What does the decline in the PFD check mean to a family? The third year the loss will be worth two cups of coffee, year-five it will cost a hair cut, and year-ten it will cost one car tire. 10:29:52 AM SENATOR WILKEN compared alternative revenue sources. Using an income tax to fill the fiscal gap would cost $1,000 to a family of four, and using a sales tax would cost $950. "I like everybody paying a little rather than a few paying a lot." This is our bridge to the future gas line. He summarized by saying that the bill bridges Alaska revenue needs until the gas line is completed and it establishes accountability by forming a spending partnership with all Alaskans. 10:33:13 AM SENATOR WILKEN said SB 134 provides benefits when needed--it only happens when there is a deficit. It minimizes the financial impact on families, doubles the life of the CBR, answers the call from D.C. for Alaskans to help themselves, and provides Alaska with a stable and dependable long-term fiscal plan. SENATOR BUNDE asked about the notion of putting new money into the economy. SENATOR WILKEN said an income tax just moves money around. This is new money coming from Wall Street and it is powerful. It gets the full multiplier effect. SB 134 was held over.