By Tim Bradner
These are interesting times for Alaska. After several years of recession, the state’s economy appears set for recovery. But now there are concerns over the heated debate in Juneau on the state budget, the amount of the annual citizen Permanent Fund Dividend, or PFD, and the structure agreed last year to use some of the Permanent Fund’s earnings to support the budget.
These could raise new uncertainties and again undermine business confidence.
Last February, Gov. Mike Dunleavy proposed a new state financial plan with sharp spending reductions, reflecting the governor’s desire to “right-size” the budget so spending matches recurring income.
Oil revenues, which once supported robust state operating and capital budgets, took a sharp fall in 2015 when crude oil prices fell sharply. Since then prices have shown only modest recovery.
During his campaign last year the governor pledged to “fully-fund” the PFD through a formula that has been in state law since the 1980s.
The formula, which many say is now obsolete, calls for one half of the Permanent Fund’s realized earnings, meaning cash income, to be paid out in the annual PFD. Realized earnings includes bond interest, rentals of property and sales of equities or other assets.
The dividend calculation using this approach is done on an average of the past five years of earnings to avoid one-year bumps, up or down, due to unusual events in financial markets.
This formula has been followed over the years and has worked mainly because the Permanent Fund was smaller and the dividends were relatively modest. A growing Permanent Fund has resulted in steady growth, over time, of the PFDs.
With the Fund’s market value now at over $60 billion, the 2019 PFD, following the traditional formula, would be about $3,000, with about $1.9 billion distributed to citizens.
However, in the midst of the state’s financial crisis in 2016 former Gov. Bill Walker reduced the dividend to assure more money would be available for traditional state services, like education and public safety. The Legislature did the same thing in 2017 and 2018 amid the continuing revenue shortfalls.
What Walker and the legislators did, which was to fund the PFD at less than the statutory formula, was legal despite the existing statute.
That’s because state Constitution gives the Legislature the ultimate authority to appropriate funds, for the PFD or any other purpose. If money is short, the PFD appropriation can be cut.
The Legislature’s authority to fund at any amount or even to not pay a PFD, was made iron-clad by a state Supreme Court decision reaffirming that the dividend a state program like others, like schools or the state troopers, and subject to legislators’ decisions.
What has now created a dilemma is that the Legislature set up an internal conflict when it passed Senate Bill 26 last year. This was a landmark bill that established, for the first time, a framework for structured withdrawals from the Permanent Fund’s earnings reserve to help fund the budget.
This is not money from the Permanent Fund itself, which is protected, but from the Fund’s earnings reserve, which holds the accumulated and unspent income and is available for appropriation.
The PFD was not part of the 1976 decision. This came later, put in state law in 1982 as a way to give individual Alaskans a direct share of the oil wealth and to create a citizen constituency to protect the Fund from politically-inspired spending of its assets.
The conflict is that Senate Bill established a mechanism with a percent-of-market-value to determine the annual withdrawal, similar to the way most large endowments work in support of universities or charities. The Legislature chose 5.25 percent and after three years 5 of the Fund’s value, averaged over five years, as the annual limit. Withdrawing more money beyond that would cut into the Permanent Fund’s long-term sustainability.
However, the 5.25 percent withdrawal must cover funds for the state budget as well as the PFD. If the dividend grows at a rate that is different than the overall market growth of the Fund, because the PFD is linked to realized cash earnings, there is a dilemma.
It is that a growing PFD, as a share of the 5.25 percent (or 5 percent after 2021) means fewer dollars for public services. That means services must either be cut or new revenues obtained, most likely by taxes.
The conflict is illustrated by Gov. Dunleavy’s proposed “full-funding,” which would divert several hundred million dollars away from public services next year unless there were taxes, which is unlikely in the near term.
To solve this problem many legislators believe a fixed allocation could be made within the POMV with a certain percentage for the dividend and a certain percentage for the budget.
The idea of a 50-50 share has many supporters. Such an approach would have money for the PFD increasing at the same rate as money for the budget, eliminating the squeeze on the budget money caused by the formula link if the dividend to realized income.
Two important problems with the realized income approach is that large bumps in cash income, for example through a sale of a major asset, could artificially raise realized earnings, and the PFD, even if there were no change in the underlying market value of the Fund.
It’s unclear as this is written how this will play out. The Legislature has rejected, for now, the large $3,000 PFD and has established a special task force to work out a revision of the formula. The governor still wants the large dividend, however, and has cards left to play, including vetoes of parts of the budget.
It’s a fluid situation – there could still be budget havoc, creating economic uncertainties.
Alaska’s state government is never dull.
Tim Bradner is copublisher of the Alaska Legislative Digest and Alaska Economic Report.
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