The Senate Finance Committee debated Wednesday, March 27, a potential change to the Permanent Fund dividend (PFD) formula ahead of the introduction of a bill.
“For the last couple of years… the statute calculating the Permanent Fund dividend was ignored, and instead, the dividend was negotiated separately and specifically among the legislature and the governor. It has become a focal point, and it’s affecting campaigns and distracting legislators from other important work,” Senate Finance Co-chair Natasha von Imhof (R-Anchorage) said in a hearing.
“The question is, how do we make sure, as we move forward, that we have enough money to pay both a dividend, as well as all the other necessary government functions?” she asked.
Gov. Mike Dunleavy has proposed paying a full statutory dividend of roughly $3,000 per person at a cost of $1.9 billion.
That cost is greater than the size of the deficit, von Imhof noted in a presentation.
“For every $500 PFD check, it costs the State approximately $324 million, roughly, to pay it,” von Imhof said.
A statutory PFD also leaves only $1 billion of the $2.9 billion percent-of-market-value (POMV) draw from the Permanent Fund Earnings Reserve Account (ERA) to pay for government services.
To compensate, Dunleavy would cut $650 million from public education, Medicaid, and the University of Alaska, while shutting down the Alaska Marine Highway System (AMHS). He would also drain the $172 million Statutory Budget Reserve (SBR) savings account and pay $254 million in oil tax credits from another fund, the Alaska Industrial Development and Export Authority (AIDEA), that provides capital for private businesses.
von Imhof sees the percentage of the POMV draw that goes to dividends as the fundamental issue driving the budget debate.
“Since the dividend amount is now dependent on the total amount of the POMV draw, and if our goal is to stop haggling over the dividend for the next 40 years, as well as protect the Permanent Fund for the long term and don’t take too much out of it to erode its value, we should start thinking about the split,” she told committee members.
If the State dedicated 20 percent of the POMV to dividends, as opposed to the two-thirds Dunleavy has proposed for FY 2020, there would be no deficit. PFDs in that scenario would be about $1,000.
Sen. David Wilson (R-Wasilla) and Sen. Bill Wielechowski (D-Anchorage) said they were uncomfortable discussing the POMV split between government and PFDs without a bill.
“The Permanent Fund is the people’s money,” said Wielechowski. “We still have a statute on the books that defines how much the dividend should be. If the legislature wants to continue to ignore that statute, they should change the statute. If someone wants to introduce a bill that says, ‘The dividend shouldn’t be $3,100, it should be $1,000,’ go ahead and introduce the [bill]. Let’s debate it. Let’s have a vote on it. But that has not been done yet.”
“That is true. There isn’t legislation filed yet to restructure the dividend,” acknowledged Senate Finance Co-chair Bert Stedman (R-Sitka). “The concept is being put on the table showing some of the peril that the current structure faces and to start that discussion.”
Sen. Stedman: “We Can’t Get $861 Million in Reductions.”
If the legislature were to pay a statutory dividend this year without considering any new taxes to fill the deficit, it would either have to drain another savings account, the Constitutional Budget Reserve (CBR), or pull additional money from the ERA.
“Some of us would be appalled at that. We’re trying to protect the entire Permanent Fund,” Stedman said.
While the Permanent Fund corpus is protected in the constitution, the $16 billion ERA is in statute and accessible with a simple majority vote of the legislature.
“If we do spend down the Earnings Reserve Account in the next five years, then 50/50 or 60/40 of nothing is nothing,” von Imhof noted.
Citing the presentation, Stedman said that if all of the POMV were dedicated to PFDs, the check would be nearly $4,700.
“We wouldn’t be able to make our payroll, and frankly, the economy would go flat on its face. It would make the proposed reductions in this year’s budget look like chicken food,” he warned.
A 50/50 split would mean PFD checks of $2,300, but still leave a deficit of $861 million.
“We can’t get $861 million in reductions. That I can virtually assure you,” said Stedman, who chairs the operating budget. “I can’t get there. It’s going to be a number substantially less than that.”
“I get lots of emails from folks that support the governor’s budget, which seemed to deliver those cuts in one year. Why do you say that we can’t get those cuts in one year when we have a budget in front of us that, to some people, seems to deliver that level of cuts?” Sen. Peter Micciche (R-Soldotna) asked Stedman.
In addition to there being no political will for that level of cuts, Stedman said there isn’t enough money in State departments to cut $861 million.
“DOT [Department of Transportation & Public Facilities] is where the Marine Highway is. If you eliminate the Marine Highway, that bar’s not very big to start with, in the scheme of things,” he said, referencing a graph in the presentation. “It doesn’t turn the system around. I’m going to bring back the recommendations from all the individual members, but there is little likelihood that it is going to be anywhere close to $800 million.”
“The question is, do more cuts equal a bigger dividend?” asked von Imhof. “More cuts may not necessarily mean a bigger dividend because it’s my perspective that the State should leave some headroom and consider past underfunding of capital [budgets]. We have leaky school roofs, damaged bridges, and aging infrastructure.”
Although the Institute of Social and Economic Research (ISER) has found that a reduction in the PFD is the most regressive form of taxation available to the State, it concluded that cutting the State budget would have a larger negative impact on the overall economy.
“Frankly, I think we’re going to be looking at a multi-year step approach to get to wherever we decide we want to get to,” Stedman told committee members. “First, we need to know where we’re going, and we need to start the discussion. Once we know the direction we’re going and the magnitude, we can start building these pieces and putting them together. But this cannot be fixed in one year at this table.”
“The direction is to make sure the State stays solvent,” he concluded.
Sen. Hoffman Argues for a PFD Constitutional Amendment
In addition to the co-chairs’ suggestion of codifying the POMV split, other committee members offered solutions Wednesday to the structural deficit.
“I think one of the options that we haven’t talked about is one that I know is politically tough, but it is an option that needs to be looked at, and that is the issue of oil taxes and the question of whether or not we’re getting our fair share for our resource wealth,” volunteered Wielechowski. “I don’t think we are.”
Wielechowski has a bill (SB 14) that would eliminate the per-barrel tax credit, preserving over $1 billion in revenue per year that oil companies currently deduct from their tax payments to the State.
A change to oil taxes or tax credits is not considered in Dunleavy’s ten-year plan released last week by the Office of Management and Budget (OMB).
Sen. Lyman Hoffman (D-Bethel) suggested that the problem is a PFD set in statute, which can be, and has been, disregarded in the appropriation process. Full statutory PFDs have not been paid since 2015.
“I think that is the essence of the problem that we’re facing today. We look at a [statute] that we have for the dividend. Governor [Bill] Walker reduced that amount, and we did not follow it. We did not override him. In fact, in subsequent years, we went ahead and ignored the statute,” Hoffman said.
“I think you’ll find that the people don’t trust us that way,” added Sen. Mike Shower (R-Wasilla). “That is a fundamental problem with government. If you don’t believe that your government is going to actually do what they say they’re going to, and we don’t follow the very laws that we make, that’s a problem.”
Hoffman compared the PFD statute to the statutory 90-day limit on the legislative session. That statute is consistently ignored, while the 121-day limit in the constitution is respected.
“The dividend becomes the issue of discussion year after year, year in and year out, and guess what gets the most attention in the budget process? It’s, what is going to be the dividend? If we do not resolve the issue on a permanent basis and let the people of Alaska decide what that might be, we are setting ourselves up for decades to come to be making the dividend a political discussion for everyone’s election,” Hoffman said in advocating for a constitutional amendment.
Dunleavy has proposed such an amendment (SJR 5) that would lock the current PFD formula into the constitution and prevent the annual payment from being vetoed by a governor.
However, failing to define the split between the PFD and government services would jeopardize the Permanent Fund long-term. As a greater percentage of the POMV is used to pay PFDs, legislators will be forced to pull more from the ERA to pay for State operations.
Stedman said he supports an eventual constitutional amendment that splits the POMV between government and PFDs, but the legislature needs to take “one bite of the elephant at a time.”
“The first bite is to put the concept on the table. Frankly, we have a draft bill, but we’ve got to refine it to put it on the table. Then, we can’t get it to the voters until the next general election in two years, so it’d be nice to get something in statute so the public can see what it is, so when they go to the polls and push the button, they’re well-informed and they’re not voting on a concept,” he said. “These are big, multi-generational decisions we’re asking the voters to consider that affect their grandkids and the generations that aren’t even here yet.”
von Imhof supports codifying the POMV split, but she does not support putting it in the constitution. There may come a time when the legislature does not want to pay PFDs, she said.
“If you put the dividend in the constitution and financially obligate future generations, it could have grave consequences in the future,” she warned.
von Imhof pointed out that there are 56 villages around Bethel that have schools and runways.
“Are you saying that you would rather put the dividend in the constitution than, I don’t know, education, health care? Is that what you’d like to do?” she asked Hoffman.
“I’d like to resolve the issue once and for all so that we, as a state, do not fight about what should be education, what are we going to spend our money on, all these other things. The one issue that’s going to rise to the top of the political agenda is going to be the dividend. It rose to the top this year,” Hoffman responded.
“What I’m hearing is some folks saying that they value the individual over the community,” von Imhof concluded. “As long as they have, it sounds to me, a $3,000 dividend, it doesn’t matter whether there’s teachers or Village Public Safety Officers or Troopers. I’m very dismayed, personally, hearing some of the comments here today because I value both the individual and the community. I value balance between core government services and the dividend. And I value a sane and reasonable size of government that also values the workforce here in our state.”
“Wait. Before we go, do you have an announcement?” Stedman interrupted before von Imhof could adjourn.
“The Permanent Fund dividend application deadline is Sunday, March 31,” von Imhof read, prompting laughter from the room.
“Just put lemon juice in my eye,” she joked to Stedman. “Thank you, Bert.”
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