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Can the Permanent Fund save Alaska’s budget, without taxes? The Senate says so – but it depends.

Is the $64 billion Permanent Fund the solution to the state's massive deficit?

Or is it just part of the solution?

Alaska lawmakers are grappling with those questions this year as part of their annual budget-writing process.

Leaders from both the House and Senate, as well as Gov. Bill Walker, agree that the Permanent Fund's investment earnings can sustainably fill most of Alaska's $2.5 billion budget gap. But they differ sharply about whether additional measures — namely, taxes — will also be needed to avoid draining the state's savings accounts.

The largely-Democratic House majority wants to levy an income tax to complement the fund's earnings — a step that members say will take pressure off both the Permanent Fund and the Constitutional Budget Reserve, an account that lawmakers have already emptied to $3 billion from $13 billion four years ago.

Last year, the House voted to pass a version of the tax that would raise $700 million a year.

But leaders of the mostly-Republican Senate majority oppose that idea.

They argue that a rebound in oil prices, combined with a reversal of longstanding production declines on the North Slope, mean that a restructured Permanent Fund should suffice to stabilize the state's finances — without taxes.

"With oil prices and production, we're within grasp of a balanced budget," Senate President Pete Kelly, R-Fairbanks, said at a news conference Monday. "I think the talk of taxing Alaskans — we would hope they would put that in the garbage can over on the House side."

Alaska Senate President Pete Kelly, R-Fairbanks, speaks at a January event in Anchorage. (Nathaniel Herz / ADN)

While lawmakers diverge on whether a tax is needed, few deny that the Permanent Fund will be the biggest piece of any fix to Alaska's budget problem.

The fund is made up of an array of investments originally seeded with — and still augmented by — oil revenue. Its earnings have historically gone largely to dividends, which are annual checks paid directly to Alaskans.

Those checks, as high as $2,000, have traditionally been paid based on a formula that's linked to the fund's investment earnings.

But in 2014, oil prices crashed, prompting a major decline in the taxes and royalties that long funded Alaska government. And since then, lawmakers have been considering whether to turn to the Permanent Fund to fill Alaska's deficit.

Even this year, with higher oil prices and production, the state is projected to use savings to cover about 45 percent of spending.

Walker and House and Senate leaders all have proposed managing the fund using the percent of market value approach, an idea long supported by the fund's trustees.

The POMV plan calls for spending a fixed proportion of the fund's overall value each year — roughly 5 percent of its average over a five-year span — instead of tying withdrawals to investment earnings.

The House, Senate and governor each favor a slightly different split of the fund's earnings between dividends and general government, though all of their proposals would reduce the deficit by at least $1.5 billion — a huge chunk of the $2.5 billion total.

Each plan would also preserve a dividend payment, although sharply reduced from what it would be under the historical formula.

But all the plans leave a deficit of $600 million to $800 million, said David Teal, the Legislature's chief budget analyst. That cash would likely have to come out of the Constitutional Budget Reserve, which could drop the balance in that account to less than $2 billion.

Walker's initial budget proposal, which is usually modified by state lawmakers, would leave a $560 million deficit next year, according to Teal's formal analysis.

But Senate majority leaders dispute that analysis, which incorporates several assumptions from Walker's administration. Baked into those assumptions, Kelly said, is "just about every piece of bad news that you can imagine."

Among them is the Walker administration's projection for oil prices, which is merged with a production forecast to predict Alaska's tax and royalty revenue.

Next year's Walker administration projection calls for oil prices at $57 a barrel. But prices are currently at $65, and Teal predicts the state's budget will balance next year if prices average $67.

Prices were $26 a barrel two years ago.

Peter Micciche (Nathaniel Herz / ADN)

"We're not in that place anymore," Senate Majority Leader Peter Micciche, R-Soldotna, said at Monday's news conference. "Aren't you glad we didn't pass a $650 million to $750 million income tax?"

Teal's projections also assume increases in state spending. While Alaska's budget has already been reduced sharply over the past several years, the Senate majority supports deeper cuts, which would further reduce the deficit.

The largely-Democratic House majority has fought Senate proposals to further reduce the state's operating budget.

But the House majority is razor-thin, with 21 members in the 40-member chamber. And there's an election in November that Senate Republicans hope could push the House in a more conservative direction.

Walker, an independent, is up for re-election, too.

"If the makeup were different, we could get substantial cuts," Micciche said in a phone interview.

Passing an income tax like the one favored by the House, Micciche argued, would hurt Alaska's economy while it's in a recession, and it would give the state government more money than it needs.

House leaders, meanwhile, argue that state government has already been reduced enough.

Majority members have introduced legislation to boost Alaska's stagnant schools budget. And they point to the governor's proposal to boost spending on law enforcement amid a public outcry over crime.

"We want a plan for Alaska that will keep Alaska the way we want to live in it," said Homer Rep. Paul Seaton, co-chair of the House Finance Committee and one of three Republicans in House leadership.

Rep. Paul Seaton, R-Homer, speaks at a news conference last year. (Marc Lester / ADN)

Oil prices and the Permanent Fund's value will fluctuate, House majority members argue, while a tax provides a consistent stream of revenue.

And, Seaton said, lawmakers' proposals initially call for spending 5.25 percent of the Permanent Fund's value each year, even though the fund's advisers say that 4.5 percent is a more realistic expected return. Reducing those expectations could expand the state's deficit by as much as $400 million.

"There are plans and there are hopes," Seaton said."And if you want to totally base your plan on hope instead of what you actually think are probable outcomes, then that's the difference."

Walker, meanwhile, has supported an income tax like the one favored by the House majority. But he's proposed a scaled-back version this year, with the proceeds directed toward a bigger capital and construction budget instead of toward filling the deficit.

Restructuring the Permanent Fund is a crucial piece of fixing Alaska's budget problem, said Pat Pitney, Walker's budget director. But it's not a "complete plan," she added, arguing that lawmakers will ultimately need to take additional steps to fill the deficit.

"We don't see enough change in the oil production and price, and development, in the next three to four years to predict anything other than a complete draining of savings," Pitney said in a phone interview.

Business leaders have pushed the POMV plan for the Permanent Fund, saying that step would remove a big obstacle to the resurrection of Alaska's economy — even if a smaller deficit remains.

"If we can get to the POMV model, that solves over two-thirds of our problem. That's huge, and I think that would give comfort to the business community that the state is taking this seriously," said Curtis Thayer, president of the state chamber of commerce. "It's a deficit that is manageable."

Curtis Thayer (Erik Hill / ADN)

Ultimately, businesses will assess whether the Legislature has adopted a "stable, credible plan," not just a short-term fix to keep government open, said Gunnar Knapp, an economist and former director of the University of Alaska Anchorage's Institute of Social and Economic Research.

"The fact that you found a way to not shut down the government doesn't create confidence," he said. But, he added: "Perfect is the enemy of the good. It's a lot better to solve 80 percent of a problem than zero percent, and it may help you think more clearly about how to solve the rest."

With only $2.2 billion projected to remain in the state's main savings account at the end of the fiscal year, a budget that leaves a $500 million deficit may not be enough to assure "smarter business people" of stability, Knapp said.

"$2 billion just doesn't last very long," he said.

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