Members of the Senate State Affairs Committee offered a cold reception to Governor Michael J. Dunleavy’s (R-Alaska) proposals aimed at paving the way to a Permanent Fund Dividend payback. Senate Bills 23 and 24, heard for the first time during Tuesday’s afternoon meeting, would repay the portions of dividends withheld between 2016 and 2018 to plug the budget deficit under then-Gov. Bill Walker (I-Alaska).
The state was facing a $1.6 billion deficit while Walker was running for the job in 2014. Then, the bottom fell out. Oil prices – revenues which pay upward of 90 percent of state government – fell victim to a global collapse of energy prices. As Kirk Johnson of The New York Times described in early 2015, any leftover optimism from halcyon days of high oil prices “sunk with stomach-churning suddenness and depth… with uniquely Alaskan scale and implications.”
The budget deficit soared to $3.7 billion before Walker was sworn in. He would take the controversial step on Alaska’s most sacred political cow and veto $670 million of the total $1.29 billion transferred from the Alaska Permanent Fund’s Earnings Reserve to the Department of Revenue’s dividend fund, in application almost halving that year’s dividend payout.
“The decision to reduce the PFD was the hardest decision I’ve ever made. It affected many Alaskans, no question about it,” Walker wrote in an editorial to The Anchorage Daily News last year. “I reduced the PFD in 2016 because the Legislature had made it clear that they were not willing to be the first to take any action that would result in less money going out to Alaskans.”
“The result, historians and economists say, is beyond the experience of this state, or probably any other in modern times: more than half of the tax base – predicated on crude oil selling at around $110 a barrel – is simply gone in the whirlwind of $50 oil, as though it never existed,” Kirk further explained. “A spending plan of $6.1 billion for 2015, passed by the Legislature last year, will fall $3.5 billion short, or more, if oil prices keep falling.”
Lawmakers would ultimately (if begrudgingly) cut dividends over the next two years. Walker also managed to eek Senate Bill 26 through the legislature last year, defining a 5.25 percent of market value (POMV) draw from the state’s Earnings Reserve Account – earnings from the Permanent Fund principal that can be appropriated for state activities – for fiscal years 2019, 2020, and 2021. After that, the the legislation mandated decreasing the draw to five percent. The $3.1 billion slated to be drawn this year was to be split between paying for the dividend checks and funding government services.
Now, with one of Walker’s most-often-times political opponents sitting in his old chair, many legislators are mulling questions ironically similar to the one he posed in newspaper pages last year: how much money should go out to Alaskans, when, and at what cost?
Dunleavy’s plan offers answers to those questions in stark contrast to the approach employed by his predecessor. As the governor noted when he introduced the bills last month, SB23 and SB24 would spread out the “back-pay” to restore the portions of the dividends withheld between 2016 and 2018 to eligible recipients (applicants must be eligible for both the current year and the year corresponding with the back-payment). $1,061 would be tacked onto this year’s dividend, $1,289 to next year’s, and $1,328 in 2020. Each appropriation would have to be signed off by the legislature in the year it is to be allocated. However, doing so would entail “unstructured draws” – draws from the ERA that exceed the POMV draw defined in SB26. The unstructured draws are estimated to be between $600-$800 million annually over the three years of back-pay.
A ten year outlook presented via slide presentation shows dividends would remain larger than the historical average of $1,350, but would be reduced by about $100 (and reductions would continue to increase over time). The larger threat is posed to the Earnings Reserve Account itself – currently valued at $16.6 billion – which runs the risk of being completely depleted if unstructured draws grow or market outlooks change.
“The account is stable. But any additional draws put that stability at risk. And as soon as you start making additional draws, that reduces your earning power and if you want to maintain the same level of budget with less earnings, it’s going to spiral pretty quickly,” Dunleavy’s chief economist Ed King explained during his presentation before the committee. “We are demonstrating that there is some additional risk associated with taking $2 billion out of the account. The governor feels that that risk is appropriate and he is willing to take it. If you try to take two billion additional dollars every year, or even $500 million additional every year above what we currently do, there is a severe risk that that account will not be able to sustain that kind of draw.” The ERA, King added, is expected to earn around $12 billion over the same period as the pay-back allocation, canceling out the additional draws.
“I’m still concerned about a natural disaster like we had with the earthquake, which is one of the reasons I’ve been a pretty bold no-vote on the budget the last four years,” Sen. Lora Reinbold (R-Eagle River) responded, emphasizing the importance of having a healthy earnings reserve in times of immediate crisis. “I’m still concerned about an international threat… [and] what’s going on with Russia, China, North Korea, etc. There’s still potential. I’m just a huge believer that we need to have reserves in the bank.… I don’t forget about these kind of things.”
While external threats like an attack from an adversarial nation are likely to be above the State’s pay grade, Reinbold’s concerns are legitimate. Rainy day funds are only structurally feasible when it does not rain every day. It has been raining a lot lately.
She noted that the slides showing a negligible decrease in the ERA cut off just as it began to tick upwards in year fiscal years 2027, 2028, and 2029.
Adding to this concern, Sen. Peter Micciche (R-Soldotna) offered a warning to his colleagues that “unstructured draws by the legislature from the Earnings Reserve will put the Alaska Permanent Fund and the Alaska Permanent Fund Dividend at extreme risk.” Through a slightly tortured metaphor, he compared the legislature to a teenager sparking their first cigarette. “The reason you don’t want them to have the first cigarette is because the second becomes that much easier. So, we have to continue to warn the legislature of unstructured draws in the Earnings Reserve.”
“The past performance does not guarantee future results,” Senate State Affairs Chair Mike Shower (R-Wasilla) said in agreement. “The performance of legislators with spending money [is] probably a generic warning of future results [being] not so good. We need to be the ones putting the handcuffs on ourselves, because we have not demonstrated that we’re very good at holding that back.”
The committee’s caution suggests Dunleavy’s proposal to make good on his campaign pledge to fully pay back dividends is going to be highly scrutinized – even among his past senate colleagues who share his party affiliation and political philosophy, and who agree with the overall concept.
“I personally find it difficult to believe that we’re going to deliver a three-quarter vote with the current makeup with the legislature, particularly observing the issues across the hall,” Micciche warned.
The next step for the bills will be to take public comment. No date for that has been scheduled. The legislation also has been referred to Senate Finance, which will be the next stop on the voyage should State Affairs offer an all-clear. As they are interdependent, both bills need to pass for the plan to move forward.