Legislature approves draw from Permanent Fund
It took three years, eight iterations of legislation and countless hours of debate filled with both meaningful questioning and pandering rhetoric, but the Legislature was finally able to send the centerpiece of a fiscal plan to Gov. Bill Walker Tuesday afternoon by employing one of the oldest adages known to mankind: keep it simple.
A House and Senate conference committee on Senate Bill 26 introduced and passed a bare-bones version of the legislation to establish a percent of market value, or POMV, draw from the Earnings Reserve Account of the $65 billion Permanent Fund in a seven-minute meeting Tuesday morning. By 2 p.m. it had passed the House and Senate on 23-17 and 13-6 votes, respectively.
Sen. Anna MacKinnon, R-Eagle River, who has led the push in the Legislature for utilizing the earning power of the Permanent Fund to greatly reduce the state’s ongoing budget deficits, called the day “a historic moment in Alaska’s future” during the brief committee hearing.
“Today, (May 8) legislators from across the political spectrum came together for a historic vote to protect Alaska’s Permanent Fund. This bill stabilizes our revenue stream, providing reliable funding for Alaskans who rely every day on state troopers, educators, and health care providers,” MacKinnon further said after the votes.
Democrat House leaders noted the approved version of SB 26 is closer to what the Republican-led Senate passed last year, but noted it will help ensure the prosperity of the Fund into the future by discouraging ad hoc appropriations from the Fund that the Alaska Permanent Fund Corp. cannot plan for.
“Last year our coalition took charge and responded to the fiscal crisis and ongoing recession. We passed a comprehensive fiscal plan to the Senate that included a POMV draw as part of a larger plan but not the only part of the plan. We felt our plan was fairer because we didn’t want to burden one group over another,” said House Majority Leader Chris Tuck, D-Anchorage, referring to the House inclusion of an income tax to raise about $700 million in addition to the POMV draw.
“However, our plan was rejected, which is why many of us voted against SB 26 today. Despite our differences on this bill, today’s vote was an example of lawmakers voting their conscience. The Alaska House Majority Coalition is a nonbinding caucus and today was a good example of that.”
Tuck voted against the bill. House Speaker Bryce Edgmon voted for it. The vote similarly split the House Republican caucus as well as members of both parties in the Senate.
Walker said in a statement from his office called SB 26 “landmark legislation” that goes a long way towards ensuring the perpetuity of the Fund and the dividend program as well.
“By stabilizing revenues, we secure Permanent Fund dividends for our children and grandchildren, and ensure services provided by the Alaska State Troopers, road maintenance crews and teachers will continue for generations,” Walker said. “SB 26 lays the foundation for our economy to grow and prosper. It provides for efficient investment of the Permanent Fund, improves the state’s position in financial markets, and perhaps most importantly, allows Alaskans to be fully confident in the future of their households and their communities.”
Alaska Permanent Fund Corp. CEO Angela Rodell joined Walker in commending the Legislature for passing the framework of a structured draw from the Permanent Fund, which aligns with what the corporation’s board of trustees has long advocated.
“SB 26 is an important milestone for the Permanent Fund and (the) APFC,” she said. “It gives us the target we have been asking for in order to craft our investment strategy and will ensure the Fund is a resource Alaskans can rely on now and in the future.”
While each body passed a version of SB 26 last year, it languished on the sideline of budget debates for more than a year as the contrasting contingencies put on a POMV draw by the House and Senate made it a particularly touchy subject.
The House called tied a $600 million-plus income tax and oil production tax increases to a Fund draw and directed one-third of the amount to PFDs.
On the other hand, the Senate insisted upon a spending cap and lowered the draw dollar-for-dollar as oil revenues increased to ensure the state did not end up with excess money available to grow the budget in high revenue years. The Senate also set PFDs at 25 percent of the larger POMV draw.
The SB 26 about to become law does none of that. It sets a 5.25 percent of market value draw for three years, which drops to 5 percent per year thereafter. It also explicitly states the Legislature shall not appropriate money from the Earnings Reserve in excess of the yearly POMV amount.
That’s it. No spending cap, tax talk or dividend split — the last of which will surely elevate PFD politics in the coming years, but at least the budget deficit will be a lot smaller.
Legislators supporting the bill also stressed that the draw amount is based on a five-year rolling average of the Fund’s value, which will make the effective 2019 fiscal year draw on July 1 closer to 4.35 percent. Such a rolling average “look back” is common among endowment draws to mitigate the effects of any single year of very high earnings or very high losses.
The upcoming 2019 fiscal year draw is pegged at roughly $2.7 billion, which, with the $1,600 per Alaskan PFD established in the operating budget, should leave the state with a deficit of roughly $500 million to $600 million. Without SB 26, the deficit would be in the $2.2 billion range.
Anchorage Democrat Rep. Les Gara acknowledged the current SB 26 is far from the fiscal solution he hoped for but noted it is the biggest piece to ending the five-year run of billion-dollar plus deficits that have drained $14 billion from state savings accounts.
“Even if it’s not the first thing I would’ve done to solve the fiscal gap I have to do it because the budget deficit is a math problem and this is part of dealing with that math problem,” Gara said on the House floor.
He also noted that not addressing the PFD in SB 26 means the entirety of the POMV draw could go towards dividends in high revenue years, however unlikely that is to happen. A $2.7 billion draw would equate to PFDs in the $4,300 per person range this year, Gara added.
Sen. Bill Wielechowski, D-Anchorage, said in floor debate that leaving the existing formula in place — that was disregarded by Walker and the Legislature in 2016 and 2017, respectively — means the Legislature will continue to bypass the PFD in law in favor of providing more cash to government agencies.
“One statute will inevitably be violated and my prediction is it will probably be that statute that provides for a full dividend,” Wielechowski said. “In fact, that’s what’s happening this year, in this budget. That’s what’s happened the last two years.”
Wielechowski is among a bipartisan group of lawmakers that has pushed to put the PFD in the Alaska Constitution. He also challenged Walker’s 2016 veto of half of the PFD all the way to the Supreme Court before losing the case. That case established the precedent that Walker’s veto authority (used in 2016) and the Legislature’s appropriating authority (used to set an $1,100 dividend in 2017) — both enshrined in the state constitution — are superior to any law subsequently passed, including the PFD formula.
Staunch conservative Rep. David Eastman, R-Wasilla, argued SB 26 reverses the Legislature’s historic priorities by putting government funding ahead of the PFD and inflation proofing the Fund.
“By enshrining this in statute we are putting the value and the longevity and the survivability of the Permanent Fund in third place,” Eastman said.
Retiring Juneau Democrat Rep. Sam Kito, who voted against it, said he simply doesn’t trust the Legislature will follow SB 26 any more closely than it has followed the PFD formula or any of the other business and fiscal principles and laws it has bypassed in recent years.
With the passage of SB 26, the major items left for the last week of the current session before the Legislature bumps up against its 121-day constitutional limit are the operating budget, which appears close to being resolved, and the capital budget, which should not be controversial.
A bill authorizing the sale of bonds to immediately pay off the nearly $1 billion backlog of oil tax credits is also pending.
Elwood Brehmer can be reached at [email protected].