What promised to be a dry hearing about the State’s debt obligations proved to be a revealing look into the mindset of Senate Finance Committee members weighing the payment of a full Permanent Fund dividend (PFD) while closing a $1.6 billion deficit.
State Debt Manager Deven Mitchell told Senate Finance Monday, February 4, that last year’s passage of a bill (SB 26) setting up structured draws from the Permanent Fund Earnings Reserve Account (ERA) has dramatically improved the debt outlook from year to year.
Prior to SB 26, Mitchell’s presentation shows that FY 2020 revenue was projected to be $2.1 billion. Now it is an estimated $5.2 billion.
“The outstanding obligations really didn’t change. There hasn’t been any new State debt issued. The school debt reimbursement program is in a moratorium,” Mitchell explained in the hearing. “You can also see that unrestricted general fund revenue increased significantly, over $3 billion.”
Tapping the ERA has provided “significant headroom,” Mitchell told the committee, bringing the budget well within healthy percentages dedicated to debt. Every additional $100 million of recurring revenue increases debt capacity $60-70 million.
However, not all of the $3.1 billion from the ERA is likely to be spent on government operations. In fact, in his preliminary FY 2020 budget, Gov. Mike Dunleavy proposed using $1.9 billion of it for 2019 PFDs, honoring the statutory formula of about $3,000 per person.
Senate Finance Co-chair Bert Stedman (R-Sitka) pointed out that Mitchell’s charts suggest the State will not pay a PFD in FY 2020.
“It appears in this chart that we have no obligation, and it would distort the numerics considerably, I would think,” he told Mitchell.
Fellow Co-chair Natasha von Imhof (R-Anchorage) agreed.
“Do we really have that cash flow, or do we not have that cash flow?” she asked. “Because if we don’t have that cash flow because there’s a statute in place that takes $1.9 billion out of that, then it means that we have less cash to actually cover the outstanding debt we have now, let alone incur any new debt.”
Without the $1.9 billion, the State actually has $3.2 billion available to spend.
“That seems to be the path we’re going down for the budget that’s about to be released,” Sen. Mike Shower (R-Wasilla) said.
Mitchell responded to the committee’s concerns by saying it is not his job to make policy decisions regarding the PFD. Rather, he is trying to point out that the draw from the ERA is available to spend.
“It’s really a matter of what are you going to spend money on, and that’s the pot of money that you have,” he said.
“It’s available,” Mitchell told Senate Finance. “That doesn’t mean it’s going to happen, but it’s available.”
Mitchell pointed out that the PFD has been lower than the statutory formula the last three years.
Former Gov. Bill Walker vetoed a portion of the 2016 PFD. The legislature then budgeted smaller PFDs in 2017 and 2018.
“What that highlights, from my perspective at this point, is that it’s available for other purposes,” Mitchell said of the ERA draw. “It’s important that people recognize that there’s choices to be made with that pot of money. One of the very important ones to everybody in this room and around the state is, what’s that Permanent Fund dividend amount going to be?”
“I can assure you it will not be zero. It’s some number north of that and probably south of $3,000,” Stedman responded. “It’s not going to be zero.”
Mitchell acknowledged that if the $1.9 billion for PFDs were removed from his debt affordability analysis, the new rosy picture would vanish. Instead, the State would still be bumping against the capped percentage of the budget committed to debt.
Borrowing While Paying Full PFDs Would Result in Negative Credit Report
The State is currently carrying $13.5 billion in debt. $7 billion of that is the unfunded liability for pensions, on which Senate Finance was briefed last week.
The State pays the portion above an employer contribution cap for both the Public Employees’ Retirement System (PERS) and the Teachers’ Retirement System (TRS).
“Once it’s committed to doing that and making those payments and has made them, it actually transfers that liability onto the State’s balance sheet,” Mitchell explained.
“While officially it’s not considered debt under the definition of a GO [general obligation] bond or municipal bond or something of that sort, it is a real debt to the State and does need to be incorporated and considered over the long term,” von Imhof agreed.
PERS/TRS payments are expected to increase over time unless the State pays more up front toward the unfunded liability.
Stedman implied that Mitchell’s data as presented Monday could cause legislators to downplay the State’s debt or even add to it. He cited the case of Alberta, another oil-dependent economy, which has roughly $50 billion in debt.
“That is exactly the road we don’t want to go down, the Alberta road, where we have $50 billion in debt and we haven’t dealt with our operating budget problems,” Stedman said.
Mitchell recounted how credit rating agencies began a series of downgrades for the State when oil fell off its peak price in 2014. Discussion and passage of SB 26 finally caused the agencies to change Alaska’s outlook to “stable” last year.
“My role isn’t to determine how money’s going to be spent or policy decisions; it’s trying to portray the State of Alaska in the strongest manner possible,” Mitchell said.
One of the strengths Mitchell lists for investors is the Permanent Fund, he said.
“We’re the only state in the nation that gives money away to its residents and doesn’t have a broad-based income tax or sales tax,” Mitchell told the committee. “That’s… an incredible strength that others would love to have.”
How many other states own subsurface rights, Stedman countered.
“I don’t know the answer to that,” Mitchell responded.
“Zero. You know the answer to that,” Stedman told Mitchell. “We’re the only state in the union that has these vast resources owned by the common. You know that as well as I do.”
“I think we’re all shareholders in a corporation because the State owns everything from six inches below the ground to the center of the Earth,” added Sen. Click Bishop (R-Fairbanks). “We have a formula for a dividend for the shareholders.”
von Imhof noted the amount of deferred maintenance in the state and the need to build more schools.
Referring to the three major credit rating agencies, von Imhof asked, ”What might Moody’s and Fitch and S&P think if the State chooses to give out two-thirds of its structured draw in the form of a statutory dividend, thereby leaving about one-third available to pay for operations… and then choose to go out and incur more debt… in order to pay for capital projects, whether it be bridges or schools or roads or what have you?”
“The scenario that you just described would most likely result in some form of report that would be negative in nature,” Mitchell replied.
A negative response would mean a higher cost of borrowing, he explained.
Money withdrawn from the ERA to pay higher interest rates cannot generate more income for the Permanent Fund through investment returns, eroding the value of the Fund over time.
Growth of ERA Highlighted by Mitchell Due in Part to Smaller PFDs
When Mitchell speaks to investors, he says he has to counter negative narratives about Alaska.
“One of the things that you hear a lot is that Alaska has the highest unemployment rate in the country, which is true. But our unemployment rate is relatively stable,” he told Senate Finance.
Investors tend to focus on the State’s declining savings accounts, the Constitutional Budget Reserve (CBR) and the Statutory Budget Reserve (SBR). Since 2014, their value has dropped from a combined $17.5 billion to $1.7 billion as they’ve been used to fill structural deficits.
“As goes the price of oil, so has gone our CBR and SBR balances,” acknowledged Mitchell.
Yet the ERA has increased from $6 billion to $15.5 billion over the same time frame, he noted.
When all available funds are taken into account, the least amount to which the State has had access was $13 billion. Currently, the three accounts hold about $17.5 billion.
Mitchell also said that the Permanent Fund makes Alaska more stable because it is tied to a diverse global economy, unlike a state income tax that would be susceptible to a recession.
Stedman noted that the Permanent Fund ERA is actually extremely sensitive to market returns.
von Imhof added that the short time frame in Mitchell’s graphs was painting an inaccurate picture of the volatility in the ERA.
Further, the ERA has about $3 billion more than it would if full PFDs had been paid in 2016, 2017, and 2018.
“We drew less money from the ERA [and] therefore left more money to earn in this bull market,” she said.
Under Mitchell’s analysis, about ten percent of FY 2020 unrestricted revenue will go toward State debt, including PERS/TRS.
After removing the $1.9 billion Dunleavy plans for 2019 PFDs, that number jumps to about 20 percent.
Paying the balance on the 2016, 2017, and 2018 PFDs, as Dunleavy has suggested, would further reduce the ERA balance Mitchell uses to convince investors that Alaska’s finances are stable.
This article brought to you by Regina Spektor’s “Us.”