Budget conference underway; Fund gains 25% in 10 months

Official work to finish the state’s 2022 fiscal year budget has slowed and it doesn’t appear lawmakers will give Gov. Mike Dunleavy’s plan to overhaul the Permanent Fund and constitutionalize the dividend much time in the coming weeks.

The House and Senate operating budgets are quite close to each other in terms of overall spending at roughly $4.2 billion and $4.4 billion in unrestricted general fund appropriations, respectively, for agency spending and other items such as debt service; the hang-up continues to be the size of this year’s PFD.

In most respects the budgets for next year are close to this year and in line with what the governor proposed as well.

Senate President Peter Micciche said shortly before the first budget conference committee meeting that he “absolutely” expects the Legislature to pass a compromise budget before June 1 — when state agencies are required to send out layoff notices if the budget for the next fiscal year starting July 1 has not been approved — even though lawmakers technically have the full 30-day special session to complete it.

The Senate passed its version of the budget 17-3 in literally the last minute of May 19 before the regular session officially ended with money for PFDs of between $2,300 and $2,400 per eligible Alaskan this fall.

Paying for dividends of that amount means “overdrawing” the Permanent Fund’s Earnings Reserve Account by approximately $1.5 billion in excess of the annual 5 percent of market value draw, or POMV, which would be just more than $3 billion for next fiscal year, according to Legislative Finance Division figures.

Micciche, who co-sponsored the amendment to increase the PFD, said he sees overdrawing the Earnings Reserve this year to “plant a flag” that a 50-50 government-PFD split of the POMV is the grand compromise that can end years of deadlock over the state’s ever-tightening fiscal situation.

“I’m willing to overdraw for a year to get a package across the finish line,” he told reporters.

Dunleavy, who campaigned on paying dividends in accordance with the decades-old statutory formula still on the books, proposed a constitutional amendment May 12 to split the POMV evenly and fold the currently spendable Earnings Reserve Account into the corpus of the Fund to prevent future overdraws.

The governor was backed by a large group of Republican legislators and Bethel Democrat Sen. Lyman Hoffman in a showing of broad support for a conceptual fiscal compromise but whether it will last after the alternatives to resolve the roughly $1 billion annual deficit the 50-50 plan are vetted remains to be seen.

Micciche stressed that the Legislature probably won’t reach the fiscal finish line until August when the second special session called by Dunleavy commences. He said individual lawmakers need to talk with their constituents about the 50-50 POMV split and the mix of taxes and a spending cap that appear to be leading ways to fill the rest of the budget gap.

“I hope that when we arrive in August we’ll arrive ready to vote, not to start a discussion,” he said. “I think we have a lot of work to do to get our constituents there as well.”

Senators also approved a $4 billion transfer from the Earnings Reserve into the constitutionally protected corpus of the Fund, a move to prevent it from being spent reminiscent of 2019 when the whole Legislature approved a $9 billion ERA-to-corpus transfer and Dunleavy vetoed $5 billion of it.

The ERA held $11.3 billion in realized, uncommitted earnings as of April 30 with another $3.9 billion in unrealized gains on invested assets.

The House, on the other hand, left the PFD out of the budget in favor of addressing it in a standalone bill. Leaders in that body have been adamant against exceeding the POMV draw limit.

The six-member budget conference committee has limited powers, meaning it can set individual appropriations at any amount between what the bodies have already passed — in the case of the PFD anything between $0 and $1.5 billion.

Similar situations in recent years have led to PFDs in the range of $1,000 per person and all three Senate conference committee members, Republican Finance co-chairs Sens. Bert Stedman and Click Bishop and Democrat Donny Olson, voted against the PFD amendment on the Senate floor.

Senate Finance approved a $674 million overall PFD appropriation in line with last year in its version of the budget, but Micciche emphasized that the budget conference members will have to consult with their respective caucuses before setting the final amount.

House Finance co-chairs Reps. Neal Foster, D-Nome, and Kelly Merrick, R-Eagle River, and Fairbanks Republican Rep. Steve Thompson are the House conference members.

The conference committee held a brief organizational meeting May 20 but as of this writing May 25 no additional meetings were scheduled.

The Senate also rolled the capital budget into its operating budget and included general language to appropriate roughly $500 million in federal American Rescue Plan COVID-19 aid.

The Senate’s capital budget would spend $264.2 million in unrestricted general funds — more than double recent years — with $38.5 million going to school repair and maintenance projects and another $113 million for transportation projects statewide. It also approves spending for more than $1.9 billion in federal money, an increase from $1.2 billion last year.

Fund keeps earning

While lawmakers continue to banter over whether and how to spend it, Alaska Permanent Fund Corp. managers have the Fund growing at an astounding rate.

As of May 24, the Permanent Fund had an unaudited value of more than $79.9 billion, up from $65.3 billion at the start of the 2021 fiscal year last July. Permanent Fund investments have achieved a rate of return just more than 25 percent in the 2021 fiscal year, according to the April 30 APFC performance report.

For comparison, the fund’s five-year return average is 11.46 percent annually and its historic return averages are in the 7 percent range.

APFC Board of Trustees chair Bill Moran said the recent growth of the fund is “unprecedented” in a formal statement but cautioned against getting overly excited about it.

“We must put this unparalleled growth into context and recognize that it is not sustainable,” Moran said. “Recessions are likely in our future and will have a negative impact on the fund, which will impact the state. Knowing that the state now gets more than 70 percent of its revenue from annual withdrawals from this fund, we must remain diligent in managing and understanding our portfolio risk.”

The fund’s nearly $31 billion public equity, or stock, portfolio had an astounding 43.6 percent return rate through the first 10 months of the 2021 fiscal year, according to the April performance report.

It was bested only by the $13.4 billion private equity and special opportunities portfolio, which had a 47.5 percent rate of return over the period. Other investment sectors had returns more in line with historical averages.

Elwood Brehmer can be reached at [email protected].

05/26/2021 - 10:11am