This past legislative session, Governor Knowles and the Legislature approved a September 14th advisory election which will ask Alaskans whether a portion of the Permanent Fund earnings and our Permanent Fund checks should be used to help fund state government.

I respect the effort and good intentions that went into the proposal, but after careful consideration, I opposed and voted against the plan. I simply do not believe reducing dividends by over $500 to fund state government should be a consideration at this time.

I agree with the need to deal with the state's fiscal gap problem, but Alaska has sufficient reserves for at least another three to six years. Steady, incremental progress toward reducing the gap can give us the time we need to solve the fiscal gap in a better way and without new taxes.

The proposed budget plan took a lot of compromise among the legislators who voted for it and the Governor. I am not criticizing any of the people who worked hard on this plan. It was adopted while oil prices were at a temporary ten-year low and projections overestimated the shortfall by close to one-half billion dollars. The Governor refused to accept specific goals for reduced state spending or a meaningful constitutional spending limit. Members of the House and Senate Democratic minorities also opposed including spending limits. This is a compromise plan of the Governor and a majority of legislators, but it only passed the Senate with one vote to spare. Senators Adams, Donley, Green, Halford, Hoffman, Taylor, and Ward voted in opposition.

If not for the significant cuts in state spending implemented over the last four years by the Legislature under the Republican Majority's five-year fiscal plan, the gap would be far worse. In addition to operating budget reductions this year, the Legislature passed cost-saving measures that consolidated two commissions and two departments, reformed the power-cost equalization program, tightened up the definition of disaster, restructured and privatized tourism marketing, limited expensive prisoner lawsuits, reformed the underground storage tank assistance program and asked Congress for more flexibility with education funding. Unfortunately, budgetary reductions and cost-saving efforts alone will not be enough to close the fiscal gap.

I believe this plan to be ill-advised, unnecessary and deceptive. I voted against it for the following reasons:

ILL-ADVISED

No Limit on Growth of State Government

The plan does not place a constitutional limit on the growth of state government in the future. Without a constitutional amendment limiting the amount of state general fund expenditures, there is absolutely no guarantee that the state will reduce future spending. I agree with former Governor Hammond that this plan is nothing more than a "blank check to politicians."

This is why I support SJR 28, a constitutional amendment that would reduce the current constitutional limit on state general fund appropriations (Article IX, Section 16) from its current level of over $6 billion to about $2.1 billion. Had this limitation been in place this year, the state would have had to reduce expenditures by about an additional 1% or $20 million.

Will Not Provide a True Measure of Public Opinion

Again, I agree with former Governor Hammond that the public needs other options to choose from if state government wants an accurate measure of public opinion. Additionally, this plan is so complex that no one can be sure what a yes or no vote really means or why voters voted as they did. Finally, to maximize public participation on an issue as important as this, it should be asked at a regular general election when more Alaskans vote and not a special election.

Payout Amount Excessive

The plan calls for an amount equal to 5.88% of the Permanent Fund to annually be used for dividends and to fund state government. The payout percentage level is too high to protect and inflation-proof the Permanent Fund. To quote from the Alaska Permanent Fund Board's publication "Question and Answers About the September 14 Ballot Proposition":

"In real 1999 dollars, the Plan doesn't quite preserve the total Fund's purchasing power in the median expected case, and the principal of the Fund goes down in real value."

"It [the 5.88 payout rate] is set too high, however, to maintain the real value of the entire Fund ..."

Dividend Calculation Modification Flawed

The plan changes the formula by which dividends are calculated. The plan proposes that the amount of the annual dividend be based on a percentage of the principal of the fund rather than a percentage of the income of the fund. The Legislature could simply manipulate the dividend calculation to additionally reduce dividends to fund bigger and bigger state government.

I disagree with this proposed change. When the Permanent Fund dividend was created, a lot of thought was given on how to calculate the dividend. The best solution was to base the dividend calculation on the percentage of income that the fund generated. This change will significantly reduce the link between income level and dividend level, which will reduce political pressure to maintain quality investments.

If the plan is adopted, there is no mechanism in place that would ensure that the plan's new calculation would be protected.

20 Years an Unrealistic Planning Period

The proposed budget plan is theoretically a 20-year plan. For a state 80% dependant on world energy prices 20 years is an unrealistically long financial planning period. Remember it was less than 20 years ago when experts predicted oil would be $60 a barrel in the 1990's. Just last year the Legislature's consultants expected at least three years of $10 to $15 a barrel. Less than a year later the prediction now is an average price of almost $18 a barrel and oil recently has been over $20 a barrel.

A five-year plan making steady incremental progress toward reducing the state's fiscal gap would be much more realistic and reliable.

Only Alaskans Pay

This plan places the entire solution to the fiscal gap on the back of long term Alaska residents - Permanent Fund dividend recipients. It is essentially a huge head tax that unfairly impacts poor, senior and needy Alaskans while holding out of state workers and tourists harmless. It means an over $100 million dollar loss to the Anchorage economy alone. There are better, more balanced approaches.

Inflation-Proofing Vulnerable

"... by retaining income in the Alaska Income Account where it remains subject to appropriation by the Legislature rather than by annually transferring it to principal as is currently the case."

"... under the status quo, the annual deposit of the inflation-proofing amount into principal gives greater assurance that money would in fact be saved."

No Specific Budget Reductions

The proposed plan does not identify any specific budget reductions. It simply states that it will "continue state general fund budget reductions." Although this year's budget reduced general fund spending, overall state spending still increased. Without a specific goal, why should the public trust the Governor and the Legislature to make budget reductions in the future, especially when they won't have to if this plan is adopted?

UNNECESSARY

We Have Time to do a Better Plan

Higher oil prices since May have reduced the fiscal gap from over $1 billion to around $400-600 million. This plan is based on oil being less than $15 a barrel, but oil is currently about $20 a barrel and is projected to average about $18 a barrel this year. The new projected prices give the state enough money in the Constitutional Budget Reserve (CBR) to last until 2004 and enough money using other reserves to last until 2009. The CBR alone is earning over $100 million a year. This gives the state more than sufficient time to address the gap incrementally over a 5-8 year period.

Not Necessary To Reduce Dividends

The proposed plan uses both Permanent Fund dividends and a reduction in Permanent Fund inflation-proofing to close the state's fiscal gap.

Again, I agree with former Governor Hammond that the first step of any such plan should have been to first ask the Alaskans for approval to use a limited portion of the undistributed earnings only, not dividends. Had this type of proposal been approved by voters, it could eliminate the current $400-600 million fiscal gap. Even with a $1 billion fiscal gap, use of the undistributed earnings could reduce the gap by over one-half and double the useful life of the CBR (from 3 to 6 years)---without affecting dividends.

DECEPTIVE

Claim Dividend Will Go Away Is False

The argument that dividends will decrease to zero if nothing is done is misleading and deceptive because it is based upon the premise that no new revenues will be generated and no significant reductions to state government will be made. It assumes that voters will tolerate and re-elect legislators who repeatedly spend Permanent Fund reserves to the point of destroying the dividend program. Even if the Legislature and the Governor wanted to do this, such a move would require legislation to repeal the current dividend program - a political impossibility. This argument is misleading because long before this would ever occur, the Legislature could reduce state spending and find other sources of revenue.

Additional Funds Will Not Go To "Essential Services"

The plan also alleges that the money coming from the Permanent Fund will be used to fund "essential public services" like education. This is misleading. The plan has no mechanism to make this happen. In fact, any money appropriated to "essential state services" would simply be used to free up money for the Legislature and Governor to spend on non-essential services.

A BETTER PLAN FOR ALASKANS

Instead of only the proposed plan and no alternatives, I believe that the Governor and the Legislature should allow Alaskans to also consider proposals that would:

• Make deeper cuts to non-essential state spending before considering use of the Permanent Fund;
• Address the fiscal gap problem incrementally over several years, thus maintaining pressure to reduce state spending and increase efficiency in state government;
• Identify specific future reductions to state spending;
• Place a meaningful constitutional spending limit amendment before Alaskans for consideration, which would ensure a limit on state spending;
• Increase state revenues by maximizing resource development income;
• Create a citizen commission to recommend specific future budget reductions; and
• Ask Alaskans whether it is time to use only a limited portion of the annual undistributed earnings of the Permanent Fund-not dividends and not the principal to help fund state government. The undistributed earnings is the amount of the annual income of the Permanent Fund after full dividends are paid and the principal of the fund is fully inflation-proofed.

I've explained the reasons why I voted no on this plan last legislative session. On September 14th it will be up to you to decide. Ask questions, educate yourself, and please vote. Your careful consideration of your vote will help decide the future of our state and our Permanent Fund.

DD/hrn

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