Most fund earnings splits still leave state with deficit

Nearly every option to change the Permanent Fund dividend being considered by lawmakers still leave the state with significant yearly deficits, according to the Legislature’s budget analysts.

Legislative Finance Division analyst Alexei Painter told members of the Legislature’s Bicameral Permanent Fund Working Group on Oct. 7 that based on the current budget and revenues, the only way to break the state’s seven-year streak of deficit spending is to make the dividend 25 percent of the total annual draw from the $65.1 billion Permanent Fund.

That solution to the State of Alaska’s ongoing deficits, Painter noted, is what the Senate passed in March 2017 in an early version of Senate Bill 26. That bill, championed by former Gov. Bill Walker, ultimately established an annual 5.25 percent of market value, or POMV, draw on the Permanent Fund from which the state could support government services and pay PFDs without violating basic financial management principles for endowment-style funds.

However, the SB 26 that passed the Legislature and became law in 2018 did not address the contentious PFD calculation, which was a major political hurdle to establishing the POMV draw that most lawmakers felt needed to happen as the state’s savings accounts dwindled.

Legislative leaders formed the eight-member Permanent Fund Working Group in June to analyze how the state should manage its giant nest egg over the long term when Alaska’s traditional oil revenue — and state savings from it — is generally on the decline.

Working group co-chair Sen. Click Bishop, R-Fairbanks, said the group will hold another meeting soon to discuss a summary report and present that information to House and Senate leaders.

Gov. Michael J. Dunleavy had said he would call a special session to address the PFD this fall — a move that could finally bring the longstanding issue to a head with his stated demand that the Legislature appropriate additional money from the fund to pay an additional $1,300 to satisfy the current statutory formula — but that has been complicated by a drawn out process to fill the seat of late Anchorage Republican Sen. Chris Birch, who died suddenly in early August.

A “25-75” split of Permanent Fund POMV revenue between dividend payments and government support would make $773 million available for PFDs in the upcoming 2021 state fiscal year based on the current state budget and financial market forecasts, according to Painter. The remaining $2.3 billion from the nearly $3.1 billion POMV draw would go into the state’s General Fund.

The $773 million would equate to dividends of about $1,100 per Alaskan.

“It’s roughly a balanced budget if you have a dividend of this size and no other policy changes,” Painter said.

The recently paid $1,606 PFDs required an appropriation of just more than $1 billion; that included a $172 million appropriation from the Statutory Budget Reserve Fund that zeroed out that savings account.

A dividend calculated with 25 percent of the overall Permanent Fund POMV draw would leave the state with a small surplus of $56 million next fiscal year if the budget grows with inflation and the state’s oil revenue forecast is correct, according to Legislative Finance modeling.

Still, a clause in SB 26 that automatically reduces the annual draw to a 5 percent draw — calculated from the Permanent Fund’s average value over the first five of the previous six years — would combine with changes in oil-based revenues to leave the state with deficits in the $100 million to $200 million range through 2026 based on the current budget and inflation projections.

If lawmakers were to revert back to the historic dividend calculation, which is approximately half of the five-year average of the Permanent Fund’s annual earnings, the state would have a deficit of nearly $1.2 billion next year, growing to more than $1.7 billion by 2023, Painter said.

It’s that large projected deficit that leads many legislators to say the current PFD and POMV statutes are “in conflict.” Backfilling the deficit with additional money beyond the 5.25 percent draw from the fund’s nearly $16 billion Earnings Reserve Account, which is available for the Legislature to spend with a simple majority, would violate endowment fund management principles and could lead to the degradation of the fund’s real value over the long-term.

The Alaska Permanent Fund Corp.’s advisor firm Callan and Associates projects the fund will grow by about 7 percent in fiscal 2020. A draw beyond the approved 5.25 percent could then eat into the fund’s ability to grow with inflation.

“They’re both equally weighted laws,” said Sitka Republican Sen. Bert Stedman, a co-chair of the Senate Finance Committee. “Both laws are subject to change by the Legislature, but what we can’t change is the Constitution. So we just need to be careful when we talk about following the law.”

Dunleavy and legislators in favor of paying PFDs based on the statutory formula have stressed a need for the state to “follow the law” in regards to paying dividends.

Dunleavy has proposed paying dividend amounts — and drawing beyond the 5.25 percent from the fund — forgone over the previous three years when the amount was first by Walker with a veto and then Legislature through the appropriations process.

Stedman, an investment manager by trade, has been a leading voice in the Legislature against making additional ad-hoc draws on the fund for fears they would damage its long-term value. He and some other lawmakers, including Bishop, have suggested the current POMV draw rate might be too high as well.

Palmer Republican Sen. Shelley Hughes for years had been one of the lawmakers advocating for full PFD payments and significant budget cuts to resolve the deficit, but she recently amended that position.

A majority of legislators, urged on by significant public opposition to Dunleavy’s plan to cut more than $1 billion out of the state’s roughly $4.5 billion unrestricted General Fund budgets, have said the state cannot absorb cuts of that size and still provide the services most of the public expects.

With those same legislators by and large opposed to additional draws on the Permanent Fund and taxes being an ever-politically sensitive topic, recalculating the dividend formula is a focal point of the budget debate.

Hughes said during the meeting that a formula leading to somewhat smaller PFDs makes sense but to make it palatable government should not receive more from the fund than the public does.

“Let’s make it fair and agreeable and go 50-50,” she said.

“I am and expect to get beat up a bit by folks in my district and across the state that are supporting the historic (PFD) formula and have looked for me to carry that flag but I think we have to be realistic and we do have a mathematical problem and we have to realize that the historic draw is eroding the growth of the fund and we do have to make a change.”

Stedman and Finance co-chair Sen. Natasha von Imhof, R-Anchorage, proposed legislation last spring to change the PFD formula to be a 50-50 split of the POMV draw, but it did not ever come before the committee for a vote.

An even split of the POMV draw would provide more than $1.5 billion for both state services and dividend payments next year. Individual dividends would be in the $2,300 range — instead of about $3,000 under the current formula — and gradually grow to more than $2,500 over several years, according to Legislative Finance figures.

However, lawmakers would still have to resolve a roughly $700 million deficit in 2021 and that deficit would likely grow to more than $1 billion by 2024 without additional measures, Painter said.

While a 50-50 POMV split would still leave lawmakers with a lot of work to balance the budget, Hughes characterized it as a “grand compromise” that could be a big step towards resolving the issue that has dominated Alaska politics for four years and counting.

“We have many important things in the state to work on and we’re getting wrapped around the axle on this one issue and it’s keeping us from addressing other problems,” she said.

Bishop said Painter’s modeling indicating that nearly every change to the PFD being discussed still leaves the state with a deficit is a signal that it’s time for Alaska to look for new cash flows. For several years he has proposed the state reinstitute a small employment head tax to help fund school maintenance and construction.

“Personally, it’s my opinion that we need to continue to look at new forms of revenue because I believe Alaska has a 20- to 30-year window to diversify our economy and the sooner we get ahead of the curve the better off Alaska’s going to be,” Bishop said.

Elwood Brehmer can be reached at [email protected].