Wednesday, May 9, 2018

Let's be real about the potential costs of HB 331

Some legislators who we have criticized for voting yes on HB 331 posted a link yesterday to a response to an earlier piece we did on the subject, presumably because they think the response rebuts our criticism of their vote. 

It doesn't.

We can sort of understand the initial inclination to interpret it in that way. The title is Follow-up: HB 331 is Still a Good Deal. But those reading the article quickly understand that the title really is "HB 331 is a good deal ... if you do certain things." 

As it was constructed when those legislators voted for it -- and remains to this day -- HB 331 doesn't do those things. Without them, even the response effectively admits HB 331 results in "a net negative to the state."

After working through some initial Latin, here is what the response says:
What if, rather than budgeting based on what the state needs, the legislature budgets to a target amount of spending? 
That would lead to a real problem. Now, rather than reducing the budget and keeping the extra money in the bank to earn interest, the legislature instead views the reduced budget as an excuse to spend that money in another way. 
If that’s the way this whole thing plays out, throw my previous analysis out the window.
Some argue that this is basically what happens with the POMV draw created by SB 26. The legislature will view that calculation as the amount they should spend, rather than the amount they can spend.

If we are going to take on debt under the pretense that the debt service will be paid with the interest on the savings, we need to protect those savings. Otherwise we may end up with an empty savings account and a debt service payment on top of it.
 
Even if the discount on the face of the certificates warrants the bill on its own, the financial implications are a net negative to the State if those savings are wasted. Which means that, at least in my mind, the passage of this bill relies upon the fact that it reduces the budget and those savings are saved.
The problem? HB 331 doesn't provide in any way protections "that it reduces the budget and those savings are saved."  And as the response admits elsewhere, the history of the legislature with respect to issues related to fiscal responsibility "isn’t great." In short, this isn’t an issue on which a legislative “trust me” deserves much weight.

As did our initial piece, the response goes on to list certain ways that HB 331 might be amended, or otherwise parallelled by other actions, potentially to provide the needed protections. Those are the certain things that, "if" done, potentially could help make HB 331"a good deal." (In our view, there are other risks beyond those that still could make it a bad deal, but at least the number of risks would be reduced).

But, again, none of those were contained, proposed or even discussed at the time the House voted on HB 331, and at least to this point still haven't. Without them, there is a high risk, and given the legislature's history, some (including us) might even say a virtual certainty that this or future legislatures will use the reduction in current spending levels created by the approach as an opportunity to increase spending in other areas. 

Indeed, some might suggest that this Legislature already is doing so with its proposed increase in K-12 spending.

If this or future legislatures do?  In the words of the response,"the financial implications are a net negative to the State."

Moreover, even if the additional things outlined in the response are done this session in an effort to salvage HB 331, they easily can be undone. Under the Supreme Court's recent decision in Wielechowski v. State, 403 P.3d 1141 (2017)
each year during the appropriation process the legislature can revise and reshuffle the manner in which funds are appropriated, even if contrary to statute.

As a result, even if the legislature were to reduce the POMV draw as we suggested in our initial piece and is repeated in the response, or set aside the requisite amount of funds in the Alaska Capital Income Fund or a separate subaccount of the Permanent Fund corpus with a firm commitment to direct the proceeds (and the appropriate part of the accumulated earnings) from that subaccount only to repayment of the debt (both of which are suggested in the response), nothing prevents either the very next or a subsequent Legislature as a part of the appropriation process from redirecting — directly or through various accounting tricks — all or a portion of those funds right back into the general fund to help pay for other things.

While some attempting to defend HB 331 may seek to dismiss or minimize the potential for such actions, the current Legislature's own use of so-called designated funds for other purposes and current reappropriation of past capital appropriations to other projects provides more than ample evidence of behavior along these precise lines.

The consequence if this or a subsequent legislature did so? Any such steps -- whether direct or indirect -- would immediately increase the cost of HB 331 to future Alaskans to the levels we discussed in our initial piece (depending on when they occurred, potentially up to a net negative of $940 million).

To be clear, we recognize that the state has an obligation to pay off the oil credits which qualify for cash purchase. But the state already has a statutory mechanism in place for dealing with those. While that mechanism comes with a cost, it is both one to which those seeking such payments agreed at the time they entered into the oil credit program and one which, based on current projections, has an end date with largely known costs in the relatively near future.

Even under the best case scenario outlined in the response, the alternative proposed by HB 331 bears a substantial risk of increasing those costs significantly more over the lifetime of the bonds if the required safeguards necessary to its success either are not put in place from the outset by the current Legislature or ignored by future ones.

Those safeguards aren't contained in the current bill and, in passing SB 26 (the POMV bill) without a deduction mechanism, one opportunity for doing so has already passed. As we outlined in our initial piece -- and as the response effectively concludes as well -- without them the so-called "good deal" quickly can -- and given the past behavior of the legislature, likely will -- become a very bad deal for Alaskans.