When the Senate Finance Committee voted on Friday to pay a full Permanent Fund Dividend of $3,000, in accordance with Governor Michael J. Dunleavy’s request, Sen. Natasha von Imhof (R-Anchorage) said something worth paying attention to.

“By moving this money, we protect it for future generations, and we force the conversation of redefining how the dividend is calculated[.]”

Figuring out what that will look like is the subject of multiple bills this session, and for a select few, the vetting process is already underway. That appears to be the next area of focus for lawmakers.

To get two sentences into this article without a migraine will require a brief explanation of the Permanent Fund, because, as it would turn out, it’s a lot more complicated than a once-a-year Best Buy shopping spree. This is going to be as over-simplified and brief as possible, because the Permanent Fund is the sort of rabbit hole that breaks every bone Alice’s body holds title to.

If you have your legislative game play settings set to expert, feel free to skip this next section. Otherwise,

The Permanent Fund

The Permanent Fund is best described as a state-owned investment fund, established via constitutional amendment in 1976, housed in Article IX, Sections 7 and 15. It states, in full: “At least twenty-five percent of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral revenue sharing payments and bonuses received by the State shall be placed in a permanent fund the principal of which shall be used only for those income-producing investments specifically designated by law as eligible for permanent fund investments. All income from the permanent fund shall be deposited in the general fund unless otherwise provided by law.”

At the root of the Permanent Fund is the constitutionally protected principal, where the 25 percent of oil royalties go every year, called the corpus.

Neither the legislature nor the governor can touch the corpus – do not pass go, do not collect $200. The money deposited into the corpus is then invested and the earnings go into the Earnings Reserve Account (ERA), which, unlike the corpus, can be appropriated for State services with a simple majority of the legislature. It is also used to inflation-proof the corpus and pay out the much heralded, and unique, annual dividends to every qualifying man, woman, and child in Alaska.

Those dividends fluctuate wildly, from a low of $331.29 in 1984 to a high of $2,072 in 2015 (not including 2008, when an added rebate rocketed the total figure to over $3,200).

The ERA, according to the Alaska Permanent Fund Corporation, is currently valued at $18.4 billion, about $4 billion of which is committed to Fiscal Year 2020.

In 1990, Alaskans approved of a third feature of the Permanent Fund: the Constitutional Budget Reserve (CBR) (Article IX, Section 17). Revenue from mineral-related litigation is deposited annually in the CBR, and is available for legislative appropriation, but requires a three-quarters vote to unlock. The CBR has endured draws of about $2-$2.5 billion per year since 2014 and is currently valued at $2.36 billion — down from a high of $10.1 billion in 2015.

That year of record high CBR valuation and dividend payouts, though obviously not all that long ago, is a distant blur in the rear view mirror. Depressed oil prices have strained everything outside the corpus and, in recent years, caused both Gov. Bill Walker and the legislature to pull from every account available to fund essential services like education and health and social services. For years, the legislature has been left to fight over how much will go to fund government and how much will be sent out in dividend checks.

There is also the Statutory Budget Reserve (SBR), established in statute in 2013 and housed in the State Treasury, a piggy bank for appropriations of excess money received by the State designed to bridge fiscal gaps. Legislators have access to the SBR for general fund appropriations, and it would be exhausted under Dunleavy’s proposed budget, which calls for the remaining $172 million to go to the Department of Health and Social Services (the House budget does not call for any SBR draw).

Last year, Gov. Walker managed to squeak Senate Bill 26 through the legislature, creating a statutory 5.25 percent of market value (POMV) draw from the ERA to the general fund. But, even with that allowance, the 31st Legislature was greeted with a $1.6 billion budget shortfall before they could even find their seats in Juneau.

Rep. Adam Wool (D-Fairbanks) prepared a helpful infographic breaking down what the current statutory regime looks like:

One note of caution before proceeding however: While the Permanent Fund is in the Alaska State Constitution, the Permanent Fund Dividend — at least as of right now — is not.

The first two proposals are constitutional amendments, meaning that two-thirds of the legislature would have to give each the green light to move on to the next round, which would be a vote by the people on the next general election ballot. A simple majority would need to approve for either proposal to then become law — and would require the same process if, for whatever reason, the action needed to be undone. This is the indelible pen approach.

The second two proposals are statutory and would require only a simple majority vote by the legislature to enact.

House Joint Resolution 6

House Joint Resolution 6, sponsored by Gov. Michael J. Dunleavy, is one of three constitutional amendments the administration is offering as a package deal – but each has been proposed stand-alone due to concerns that, bundled together, they would represent constitutional revisions rather than amendments.

“The proposed amendment would constitutionally protect the people’s right to determine the future of the PFD,” Dunleavy describes HJR6 in his sponsor statement. “The PFD creates a vital connection between the people and the government by providing every Alaskan a share of our great state’s natural resources. Distributing a dividend which is based on performance of the fund also creates and important connection between its owners and the activities and investments that provide the fund’s security and growth.”

HJR6 is limited in scope to amending the constitution to recognize the Permanent Fund Dividend and lock in place the current (as of January 1 of this year) formula used to calculate annual dividends. Each year, after the amount of dividends has been calculated, those funds would be isolated for the strict purpose of disbursement.

Any change in statute to that formula – or any substantive increase or decrease in taxes, oil or otherwise – would require a vote of the public to approve or disapprove.

The proposal would not change anything else. But, it would be a big change.

Department of Revenue Commissioner Bruce Tangeman explained to the House State Affairs Committee last week that, for over three decades, the Permanent Fund and the PFD worked as it was designed to without need for the latter being added to the Alaska State Constitution.

“The PFD calculation and the amount paid to Alaskans was never questioned, regardless the size of the check, until 2016, when the legislature appropriated the full dividend and the governor vetoed it by half. And then, for 2017 and 2018, both sides were in agreement for a reduced dividend,” he said. “No politics whatsoever went into it. It is what it is; it was what it was. I think, once political decisions were made on it, that’s when it got people’s attention and that’s where we are right now, I believe.”

Under HJR6, Tangeman said, there would no longer be the need for appropriating PFD amounts. Instead, the calculation would result in a dollar amount and the dollar amount would then be transferred to a payment fund for distribution.

“That dividend program can be changed. It can be changed by the legislature. Any change would be subject to the voters,” Assistant Attorney General William Milks added.

“It doesn’t protect the Earnings Reserve, so the legislature could still draw down the ERA, correct?” Rep. Zack Fields (D-Anchorage) asked.

“Correct,” OMB Director Mike Barnhill replied, adding, “It does not enshrine a particular statutory approach to the Permanent Fund Dividend calculation, so the legislature retains the right to change that. It just requires that the people vote on any changes that the legislature makes…. It prepackages a referendum.”

The addition of a trigger mechanism into the constitution requiring any statutory change in PFD calculation or in tax structure to be voted on by the public, however, creates a troublesome precedent.

“You’re almost introducing another branch of government,” Rep. Adam Wool (D-Fairbanks) interjected. “Now you have the people that will have to basically be involved. If we want to raise or lower something, we can do it, but then we have to get the approval or disapproval of a whole other body which is going to take a year or more and a lot of campaigning to try to educate people on what we want to do or undo.”

This is the hurdle set in place with the indelible pen approach, and legislators seemed hesitant to sign off. HJR6’s companion legislation in the Senate has been greeted with similar concerns, though it has passed two of its three committees of referral.

“I would suggest to the committee that if the legislature… were to make a change to the Permanent Fund Dividend calculation statute – say it’s 50/50 [POMV split between paying dividends and the general fund] or something else – I think there’s a probably a relatively high likelihood that a referendum would be filed. So, we would be there anyway,” Barnhill concluded. “We’re just pre-packaging it. Making it automatic.”

House Joint Resolution 18

House Joint Resolution 18, sponsored by Rep. Jonathan Kreiss-Tomkins (D-Sitka), is a constitutional amendment that rolls the ERA into the corpus and relies on a “hardened” five percent POMV draw from the newly created, consolidated fund to pay for State services as well as the dividend.

Mimicking the provisions established last year in SB26, it assesses that POMV based on the fund’s market value over the first five of the preceding six fiscal years.

“Because POMV-based management of the Permanent Fund renders the function of the earnings reserve account obsolete, HJR 18 also merges the earnings reserve account with the principal; effectively all of the Permanent Fund becomes the principal,” Kreiss-Tomkins explains in his sponsor statement. “HJR 18 addresses the urgent and bipartisan goal of protecting the real value of the Permanent Fund for future generations. In addition, HJR 18 provides the Alaska Permanent Fund Corporation certainty in managing assets, allowing APFC to earn a best possible return on its investments, for the benefit of Alaskans.”

The POMV draw, capped at five percent, would allow for inflation-proofing of the corpus, as the Alaska Permanent Fund Corporation boasts a five-year, 8.91 percent rate of return.

“I’ve seen the legislature spend down $14 billion or so since I was elected out of savings, because that was easier than cutting the operating budget and/or passing taxes,” he told the House State Affairs Committee last week. “Regardless of which of those two were the right thing, one of those two needed to happen but neither happened because it was easier to spend down savings. I found that deeply frustrating.”

At current oil prices, combining the accounts and then shrinking the POMV draw from 5.25 percent to five percent would immediately translate to either further reductions in State spending or lower dividends, and could force the legislature to consider exploring new revenues – the latter of which elected officials have refused to do.

A .25 percent reduction may not seem like much on paper, but it means hundreds of millions of dollars. HJR18 runs the risk of further restricting spending by removing ERA draws as an option, essentially backing lawmakers into a corner. But Kreiss-Tomkins says it’s necessary.

“Having hard protections feels like an important and prudent measure to take,” he explained. “The Permanent Fund isn’t just a $14-to-$15 billion savings account. It’s one of the largest assets – a sovereign – the world has.”

Valued at nearly $65 billion, Alaska’s Permanent Fund is, in fact, the 27th largest sovereign wealth fund in the world and by far the largest in the United States. Texas’s Permanent University Fund comes in a distant second. At $21 billion, it is less than a third the size.

“While this protects the corpus in the constitution, where’s the dividend?” Rep. Sarah Vance (R-Homer) asked.

“The draw every year under our five percent POMV approach would be more than sufficient to pay the $3,000-plus dividend if there were the political will in the legislature,” Kreiss-Tomkins replied, adding that he, personally, would like to see the PFD enshrined in the constitution. “In all likelihood it’s going to be less [this year], because that’s where the legislators Alaskans are sending to Juneau are landing. It becomes a decision for the legislature.”

Vance, in follow up, pointed out his choice of language used in relation to appropriations to the general fund from the POMV draw. Section 2 of the bill reads: “Each fiscal year, the legislature may appropriate from the permanent fund to the general fund an amount that is not more than five percent of the average fiscal-year-end market value of the permanent fund for the first five of the preceding six fiscal years, including the fiscal year just ended.” [emphasis added]

Why use “may” instead of “shall,” Vance inquired.

Kreiss-Tomkins answered that using less restrictive language allowed for scenarios where oil prices jumped and the legislature could choose to use less than the full five percent draw, instead tucking excess revenue away into the fund for future use.

House Bill 132

House Bill 132, sponsored by Rep. Adam Wool, re-imagines the Permanent Fund Dividend as more of a production bonus tied to oil revenue, rather than the current model of investment averages. It seeks to “maintain annual, oil-derived payments to Alaskans while reducing the uncertainty in government funding inherent in the status quo,” according to Wool’s sponsor statement, which would be accomplished by “calculating the PFD based on a percentage of oil revenues.”

Current statute bifurcates oil revenue into two categories: old oil, defined as pre-1980s leases; and new oil, defined as post-1980s leases. 25 percent of old oil goes to the corpus alongside 50 percent of new oil. Whatever is left over after the 50 percent of new oil is deposited into the corpus goes to the general fund, where legislators argue how much should be appropriated to fund government services and how much should translate into PFD checks.

HB132 ditches the distinction between new and old oil leases and creates one pot. 25 percent of that new and consolidated pot, per above-mentioned constitutional mandate, continues to go directly to the corpus. Of the 75 percent of revenue left, 42 percent would go directly to the general fund to be appropriated for State services and 33 percent would go to dividends.

Courtesy of Rep. Adam Wool (D-Fairbanks)

The dividend would be capped at $1,800, meaning any remaining revenue above that would also land in the general fund. And, while there is a cap, there is no floor, meaning that down years would come with the potential of very small (if any) dividends. Wool estimates that combining new and old oil leases will result in an overall reduction of annual payments to the Permanent Fund corpus from about 31 percent to 25 percent.

“We’ve been sort of breaking the statutory law in how we pay out the PFD the last several years,” Wool explained. “The formula, statutorily, says one thing and we’ve been doing something else. So, this bill will also eliminate the old statute so that we won’t be breaking the law. And we will set up a new statute which would be more easily followed.”

“Will this give us the flexibility to utilize the POMV as needed, separating government services and the dividend?” Rep. Laddie Shaw (R-Anchorage) asked.

“What this bill will do will leave the POMV from the Permanent Fund – the five percent, or, currently, the 5.25 percent – that will go directly, in full, to the general fund,” Wool replied. “So, no portion of that will be siphoned off for PFD checks.”

“Since the legislature has saw fit to not follow the law according to current statute, what makes you think that we would be any better when it comes to following the statute you’ve set out?” Rep. Gabrielle LeDoux (R-Anchorage) asked.

“When [the Permanent Fund] first started, it was in the hundreds of millions and was invested mostly in blue chip stocks with low returns. It wasn’t supposed to be a check that you got that you could plan your annual automobile purchase or snowmachine purchase on,” he responded. “I think the Permanent Fund dividend has morphed from an annual, sort of, bonus check that could go from $300 to $1100, into what has become now sort of a guaranteed income. And with this new structured draw and the size of the Permanent Fund – right now it’s at $3,000 – it’s going to go to $4,000 pretty soon. To me, that defies what the original intent of the dividend was. So, I think the Fund stays intact and it will be used to fund our government and services.”

“Although the principal of the Permanent Fund is primarily derived from oil wealth, the performance of the Earnings Reserve and by extension the value of the PFD have arguably tracked more closely with stock market fluctuations than with the price or production of oil,” Wool’s staffer, Nathaniel Grabman, told the House State Affairs Committee last week. “In the same way the taxpayers are more likely to pay attention to government spending than non-taxpayers, tying the dividend directly to Alaska’s oil revenue will ensure that residents remain informed and engaged with respect to the state’s oil prices, production, and policies.”

Wool compared his philosophy of the dividend to an average citizen buying stock in Ford Motor Company.

“If they have a good year, you get a good dividend check. If they lost money that year, you don’t get a good dividend check,” he explained. “This is tied more to year-to-year performance.”

The philosophy behind HB132 — that dividend checks should be seen as a perk rather than guaranteed income — is where Wool’s proposal diverges from all others and, similarly, what makes it, at least at first blush, entirely unpalatable to the legislators receiving it. Despite its aim paralleling the more traditional concept of a “dividend” in western economics, it is anathema to the understanding of the PFD in Alaska.

“Who do you represent?” Vance challenged Wool during the bill’s hearing. “The State or the people?”

“I’ve probably made my mind up about it,” Rep. Gabrielle LeDoux (R-Anchorage) added.

In other words, whatever its potential merits, this bill will go nowhere.

Senate Bill 103

The Committee Substitute for Senate Bill 103, sponsored by Sen. Natasha von Imhof (R-Anchorage) is the most comprehensive measure currently being offered regarding the Permanent Fund.

The proposal relies on the 5.25-percent POMV draw established under SB26 (which lowers to five percent in FY22), and simplifies the statutory formula for calculating how much money goes into the ERA each year. Additionally, it specifies voluminously that no appropriations can be made exceeding the balance of the ERA.

SB103 is also a statutory change, meaning it would require only a simple majority vote by the legislature to do and, subsequently, undo or modify if necessary.

“The new dividend calculation would be the sustainable POMV amount. It would put a ‘split’ into law, where individual Alaskans would benefit from a dividend and the community would benefit from funding core government services,” von Imhof describes in the bill’s sponsor statement, adding, quite optimistically, “This will allow Alaskans to move forward, past politics, to work together to deliver on the promise of Alaska – a place where people come together to celebrate our frontier spirit, help each other in time of need, share our state’s bountiful blessings with our friends and neighbors and save for the future of our children.”

In a presentation to Senate Finance on April 10, Sen. Bert Stedman (R-Sitka) reminded his colleagues that, while the Permanent Fund itself relies on deposits from oil revenue, the ERA is dependent on market performance. That’s why, as recently as 2009, the value of the corpus remained relatively static while the ERA bled down to just over $420 million. Meanwhile, over the last few years, oil prices have taken up residence in the gutter but the returns on investment for the ERA have swollen the fund to nearly $19 billion.

Courtesy of Sen. Bert Stedman (R-Sitka)

“We have massive earnings reserves compared to what we had in history driving a fairly large dividend,” Stedman explained. “And what we’re trying to do is come up with a smoothing of the dividends and the cash flow to the general fund if and when it’s needed – which obviously is this year.”

SB103 would use a five year average of the corpus (the tested model to alleviate market fluctuation) to establish the 5.25 percent POMV draw and split it, 50/50, between the general fund and dividends. It’s an attempt to both make the formula more efficient and simplify it as much as possible – while taking away the ability of elected officials to talk their way around spending beyond any statutory appropriations limit.

Courtesy of Sen. Bert Stedman (R-Sitka)

“You ask the average citizen of the state to define what ‘statutory net income’ is and their eyes will go blank,” Stedman elaborated. “We want this clear and transparent and, in the event that future legislators look at violating this structure, they’re not going to be able to hide behind some flim flam and justify it, because every eighth grade student in Alaska should be able to calculate what their dividend is.”

The 50 percent of the draw that goes towards dividends is mandatory, but the 50 percent that goes to funding State services is not. This could mean that, in years when the ERA is outperforming the need for appropriations to the general fund, money could be tucked away. It could also result in draconian restrictions on spending even when that spending is warranted. That’s up to the legislature. Being that this is a statutory change, making it optional staves away any concerns the law could be viewed as a dedicated fund – which would require a constitutional amendment.

Looking at future projections (Stedman referred to it as a “Ouija Board”), the result would mean a slightly reduced PFD. In FY21, for instance, the traditional formula would produce an estimated $3,111 PFD, whereas, under SB103, it would be $2,323. Public spending, conversely, would net an additional $508 million.

Senate Finance will take up SB103 again on Monday morning. It would appear that, in terms of modifying the Permanent Fund to comply with the times, von Imhof’s proposal has the momentum.

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