Cliff Groh

GUEST COMMENTARY: Maintaining Alaska’s fiscal system is mathematically impossible

Editor’s Note: This is the sixth installment of a continuing series on the Permanent Fund dvidend and Alaska’s fiscal system. Alaska’s fiscal system is unworkable under all likely scenarios. Detailed projections from the Alaska Legislative Finance Division — the non-partisan expert scorekeepers — show that the numbers make our situation untenable. That agency’s scenarios feature these base assumptions: • This year’s adopted budget growing in future years at the assumed rate of inflation • Revenues as projected by the Alaska Department of Revenue from existing taxes and royalties • Additional revenues from the draw on the Permanent Fund Earnings Reserve Account according to the 2018 statutes establishing the percent of market value, or POMV, system • No revenues from broad-based taxes such as an income or sales tax (because Alaska has not received any since repealing the personal income tax in 1980) • Growth of the Permanent Fund at 7 percent annually If you go by current law, the State of Alaska’s future outlays include Permanent Fund dividends paid under the formula contained in statutes adopted in the 1980s (although those statutes have not been followed since 2015). That statutory dividend formula provides that 50 percent of the Permanent Fund’s income (or earnings) in a category defined as “income available for distribution” or “statutory net income” is paid out each year as dividends, which would provide a dividend of nearly $3,000 this year (instead of the $1,606 that was actually distributed). Putting together those elements and assumptions makes for a grim picture. The State of Alaska is more than $1 billion short each year over the next eight years, according to Legislative Finance Division. This is bad given that the total annual outlays — the budget with the dividends under the statutory formula — are in the range of $6.5 billion to $7.7 billion in that period, and the projected deficits continue to grow for decades afterwards. (These numbers are unrestricted general funds or UGF, which is what most people mean when they refer to the “budget” and the “revenues.”) Starting in fiscal year 2022 (which is less than two years away), the scenario shows that all the rest of the state’s spendable savings disappear except for the Permanent Fund Earnings Reserve Account, which would then be spent down to fill the gap. Spending down the Permanent Fund Earnings Reserve Account has multiple negative effects, including reducing future dividends. And it’s easy to see more downside than upside. Dial up some plausible negative events — a substantial drop in oil prices or in the financial markets, a major earthquake or act of terrorism that shuts down the Trans-Alaska Pipeline System, a decline in the worldwide demand for oil. Those events could cause the Permanent Fund Earnings Reserve Account to go to zero, leaving the state broke and unable to fulfill its obligations. That would be the fiscal reckoning for Alaska. These terrible outcomes lead some Alaskans to reach for what economists call heroic assumptions. One favorite prospective savior is more Alaska oil production, but it is highly improbable that higher production can be enough by itself to fill the large and persistent fiscal shortfall. Another hoped-for rescuer is relatively small and painless budget cuts, but an approach relying heavily on additional budget cuts collides with inconvenient facts. First, the budget has been cut a lot in the past half-dozen years, and most low-hanging fruit is gone. Second, the reactions this year to Gov. Michael J. Dunleavy’s proposed budget cuts and vetoes show that most Alaskans don’t want an approach that seems to cut too much too fast. It remains important to search for budget efficiencies, but that effort cannot save us by itself. Mathematical reality will not allow our fiscal system to stay intact, and it does not appear that we will be easily bailed out of these big and continuing deficits. This means that we need to look at additional revenues from broad-based taxes and/or oil tax increases — as well as examine the system for paying dividends. That’s the topic of the next installment in this series. Cliff Groh is an Anchorage lawyer and writer as well as the legislative assistant who worked the most on the bill in 1982 that created the Permanent Fund dividend we have today.

GUEST COMMENTARY: POMV system vs. dividend formula: something’s got to give

Editor’s Note: This is the fifth installment of a continuing series on the Permanent Fund dividend and Alaska’s fiscal system. Discussion is increasing about changing the Permanent Fund dividend formula, which has not been used since 2015 but remains on the books. Driving this new talk is the State of Alaska’s transformation of its fiscal system in 2018 through the adoption of a percent of market value, or POMV, regime. The Legislature created the dividend formula in the 1980s, with the final change occurring in 1986. The dividend formula is based on the Permanent Fund’s earnings (or income). The statutes setting out the dividend formula provide that the pool of money from which dividends are paid consists of 50 percent of the “income available for distribution,” defined as 21 percent of the Permanent Fund’s net income for the last five fiscal years. The Legislature adopted a very different formula that constitutes a conceptual change to the state’s fiscal system in 2018. Before 2018, the only uses for the Permanent Fund’s earnings in significant amounts were to pay dividends and inflation-proof the Permanent Fund principal. The statutes bringing in POMV in 2018, on the other hand, established a new fiscal system in which for the first time the State of Alaska began the heavy use of Permanent Fund earnings to pay for conventional public services such as schools, roads, and Troopers in addition to paying for dividends. Under the POMV system, the Alaska Permanent Fund Corp. determines annually the “amount available for appropriation,” defined as 5.25 percent of the Permanent Fund’s average market value for the first five of the preceding six fiscal years. (As of July 1, 2021, that 5.25 percent goes to 5 percent.) The statutes creating POMV state that the Legislature may not appropriate from the Permanent Fund’s earnings an amount for public services that exceeds the “amount available for appropriation” in a fiscal year. The POMV statutes also provide — critically — that the 5.25 percent (and later, 5 percent) is supposed to cover the Permanent Fund’s earnings’ contribution to the conventional budget plus pay for the dividend. The dividend formula is based on earnings, while the POMV formula is based on value. The two formulas are philosophically different and inconsistent with each other. To see the incompatibility, let’s look back. When the stock market takes a dive — such as in 2008 — earnings will take a hit. When the stock market recovers, earnings will be high. The dividend has gone up and down with these financial gyrations. That’s why the dividend was $845.76 in 2005, $2,069.00 in 2008, and $1,305.00 in 2009, and would be about $3,000 this year under the statutory dividend formula. Wild swings like these, however, make it hard to run a government. If we are going to use the Permanent Fund’s earnings to fund a big part of state government—as POMV is designed to do—we need a predictable amount. The average market value of the Permanent Fund under POMV changes some each year, but those changes are not huge, leaving a relatively predictable amount to fund government annually. The POMV formula does not tell you what the dividend amount will be, triggering yearly legislative battles. Absent new revenues from taxes — whether broad-based taxes or oil tax increases — the POMV system also creates competition between spending on dividends and spending on public services. The adoption of POMV in 2018 represented a recognition that the State of Alaska had created a fiscal system in the early 1980s that no longer worked because it had relied on the state government getting a substantial amount of new oil money each year, which is no longer occurring. Along with the conflicts between the two formulas, talk of a new dividend formula stems from a recognition that it is mathematically impossible to use the dividend formula created in the 1980s without changes to the budget and/or the tax system that most Alaskans apparently do not support. That mathematical impossibility is the subject of the next installment in this series. Cliff Groh is an Anchorage lawyer and writer as well as the legislative assistant who worked the most on the bill in 1982 that created the Permanent Fund dividend we have today.

GUEST COMMENTARY: What are the options regarding Permanent Fund dividends?

Editor’s note: This is the fourth installment of a continuing series on the Permanent Fund dividend and Alaska’s fiscal system. Two broad options—and several sub-options—exist for the Permanent Fund dividend. Let’s show the array of possibilities before setting out some pros and cons. (Note that neither the appearance nor the location of an item on this list implies endorsement of that idea.) First, the State of Alaska could eliminate dividends. Such elimination could occur (a) with no other action; (b) through a “full cash-out,” which would involve the distribution to Alaskans of the entire Permanent Fund principal and/or the Permanent Fund Earnings Reserve while ending dividends; or (c) through a “partial cash-out,” which would distribute to Alaskans part of the principal and/or the Earnings Reserve while ending dividends. Second, we could maintain dividends. Maintaining dividends could happen by (a) means-testing the dividend so that lower-income residents receive higher payments than higher-income Alaskans; (b) following the statutory formula for setting the annual dividend created in the 1980s; (c) keeping in place the current statutory formula, but ignoring it (as has occurred since 2015); (d) amending the statutory formula (presumably to follow it); or (e) amending the Constitution to include a dividend formula, either the existing one or a new one. Now for some pros and cons. Arguments for and against various versions of eliminating dividends Wiping out dividends would save $1 billion or more per year. Your support or opposition for abolishing dividends outright probably depends both on your view of the rationales for dividends and your sense of what the alternatives are. Alaskans of all stripes would agree that such a straight-up elimination appears politically difficult. Cashing out the whole Permanent Fund principal would pay more than $70,000 to each Alaskan. It requires a constitutional amendment — which the Legislature would have to put on the ballot for voter approval — so it would take a while. Given that the budget relies heavily on the spending of Permanent Fund earnings, dissolving the Permanent Fund principal would put a giant hole in the budget. It would also leave no savings from the one-time oil wealth. Cashing out the entire Permanent Fund Earnings Reserve would pay more than $17,000 per Alaskan and could occur much faster, because by law the Legislature could do that at any time (assuming either no veto by the governor or a veto that was overridden). Wiping out the Earnings Reserve would accelerate the State of Alaska’s fiscal reckoning. Partial cash-outs of either the Permanent Fund principal or the Permanent Fund Earnings Reserve face the same pros and cons as full cash-outs, but to a lesser degree. Arguments for and against maintaining various versions of dividends That’s enough for now on options for dividend elimination; let’s consider pros and cons of various versions of keeping it. Converting dividends to a means-tested program would be legal and would save money if the payments of higher-income Alaskans were cut while lower-income residents remained the same as they would be under the current statutory formula. Means-testing dividends would also fly in the face of the philosophical arguments for dividends and probably weaken political support for dividends. Following the current statutory dividend formula would continue to make dividends the State of Alaska’s largest outlay. In the absence of other changes such as deeper budget cuts than many Alaskans seem to want and/or substantial revenues from taxes (either from the levying of broad-based taxes—perhaps income or sales—or from an increase in oil taxes), following the statutory dividend formula appears to create a big and continuing fiscal gap that will come to bite Alaskans. Leaving the statutory dividend formula in place while failing to follow it seems to be a recipe for arguments in the Legislature about the level of the dividend that eat up the session each year. Putting the statutory dividend formula in the Constitution would be both hard and raise the same questions of fiscal sustainability that following the current statutory formula does. Putting the dividend in the Constitution, however, would mean that the dividend would have to be paid under the formula regardless of the prevailing fiscal circumstances. The last two options to discuss involve a new dividend formula that ideally would be both fair and fiscally sustainable. If the new dividend formula is in the statutes, legally the Legislature could ignore it. Politically, however, adopting a new statutory formula after a full debate might make that formula stick. This list’s remaining option would be to put a new dividend formula in the Constitution. Again, constitutional amendments take time and substantial effort. The framers of the Alaska Constitution made the document hostile to dedications and fixed formulas out of a desire to give the Legislature maximum leeway to address the state’s issues and problems as they arose. Supporters of “constitutionalizing” the dividend argue, however, that the experience of the last four years shows that leaving the Legislature the freedom to decide the dividend every year breeds political dysfunction, as that single decision seems to exhaust — or even exceed — the bandwidth available to lawmakers. If there is a new dividend formula, what should it be? Cliff Groh is an Anchorage lawyer and writer as well as the legislative assistant who worked the most on the bill in 1982 that created the Permanent Fund dividend we have today.

GUEST COMMENTARY: How did we get the PFD formula in the Alaska statutes?

Editor’s note: This is the third installment of a continuing series on the Permanent Fund dividend and Alaska’s fiscal system. The Legislature created the formula for calculating the annual Permanent Fund dividend in the 1980s, but 2015 was the last year the formula was followed. Under a 2017 Alaska Supreme Court decision, the dividend amount is now set each year by the Legislature’s appropriation, subject to a veto by the governor. Given that the formula devised in the 1980s is still on the books, there is much debate over whether to follow that formula or change it. Where did this formula come from? Let’s begin with the formula now in the Alaska statutes, the collection of laws adopted by the Legislature over the years. The starting point is the annual net income of the Permanent Fund principal. The statutes characterize some of that net income as “income available for distribution,” currently defined as 21 percent of the Permanent Fund’s net income for the last five fiscal years (including the fiscal year just ended). The statutes direct the Alaska Permanent Fund Corp. to transfer each year to the Dividend Fund 50 percent of the income available for distribution. After deductions to pay for some dividend-related costs such as the expenses of running the dividend program, the amount left in the Dividend Fund serves as the numerator in the fraction that produces the dividend each year under the formula. The fraction’s denominator is that year’s total number of eligible Dividend applicants. Dividing that numerator by that denominator produces the annual dividend amount under the statutory formula. Some believe that the Legislature created the statutory dividend formula in 1982 by enacting the statutes establishing the per capita dividend we have today. This belief is incorrect in two ways. The first way that belief is wrong is that the 50 percent allocation of Permanent Fund’s earnings for dividends first appeared in 1977 in unsuccessful “Alaska Inc.” legislation for direct distribution. An allocation to the Dividend Fund of 50 percent of the Permanent Fund’s income available for distribution was also included in the original Permanent Fund dividend bill passed in 1980, which would have paid different amounts of dividends to Alaskans based on their different lengths of state residency. No dividends were ever paid under that “the longer you’re here, the more you get” bill passed in 1980, as a lawsuit blocked its implementation until the U.S. Supreme Court ruled in 1982 that the bill passed in 1980 was unconstitutional. Instead, all dividends have been paid under legislation adopted in 1982 that provides for equal payments for all Alaskans. The language with the 50 percent allocation for the Dividend Fund was one feature from the 1980 bill that stayed in the 1982 bill. Those of us who helped get that bill passed in 1982 talked about many issues involved in the per capita dividend legislation, but this 50 percent allocation was not one of them, because it just rolled over from the 1980 bill without discussion. (Fun fact: When the Legislature created the 50 percent allocation in the dividend bill adopted in 1980, the State of Alaska had a personal income tax; perhaps not quite part of the world that all those advocating for holding onto the original dividend formula long to return to.) The second way that “The dividend formula was created in 1982” story is wrong is that the Legislature has changed the dividend formula significantly since 1982. The biggest change occurred in 1986, when the Legislature changed the definition of “income available for distribution” from the average net income of the Permanent Fund for the last five fiscal years to 21 percent of the net income for the last five fiscal years. This change increased the base from which the 50 percent is allocated. The facts confronting the State of Alaska are much different than they were in the 1980s. Does the formula for Permanent Fund dividends created then make sense now? Cliff Groh is an Anchorage lawyer and writer as well as the legislative assistant who worked the most on the bill in 1982 that created the Permanent Fund Dividend we have today.

GUEST COMMENTARY: What are the most common misconceptions about the Permanent Fund dividend?

Editor’s note: This is the second installment of a continuing series; the first installment set out the original arguments for the dividend. Was the Permanent Fund created to pay Permanent Fund dividends? No. The Permanent Fund was created to save a portion of the oil wealth coming to the State of Alaska following the discovery of the supergiant Prudhoe Bay oilfield. There was no agreement about what exactly the amount saved would be used for in the future when the Permanent Fund was created in 1976 by an amendment to the Alaska Constitution, a process that requires approval by the voters. A review of the record shows that everything from dams to daycare centers to dividends were dangled as possible future uses of the savings to entice the people of Alaska to vote for that constitutional amendment. The most historically accurate explanation of the voters’ intent in 1976 appears to have come from Elmer Rasmuson, the first Chair of the Permanent Fund Board of Trustees: “The Permanent Fund began, chiefly, with a ‘negative’ goal, to place part of the one-time oil wealth beyond the reach of day-to-day spending.” The Permanent Fund dividend, by contrast, was created in 1982 by the Alaska Legislature through the adoption of statutes, which are laws the Legislature can make without getting approval from the voters. The two institutions are fundamentally different. The Permanent Fund is a public savings vehicle, while the Permanent Fund dividend is per capita universal direct distribution. Is the Permanent Fund Dividend constitutionally guaranteed? No. The Alaska Constitution contains no guarantee of any kind that Permanent Fund dividends will be paid. The constitutional amendment adopted in 1982 establishing a spending limit includes appropriations for dividends on a list of exceptions to that spending limit. That reference in Article IX’s Section 16, however, does not constitute any guarantee or requirement of payment. Has the Alaska Legislature guaranteed the annual payment of Permanent Fund dividends through the Legislature’s adoption of statutes? No. The Alaska Supreme Court answered this question definitively in 2017 in the case of Wielechowski v. State of Alaska. The Alaska Supreme Court ruled that the Alaska Constitution does not currently allow the Legislature to set up a system in which Permanent Fund dividends are paid in future years automatically. The Alaska Supreme Court stated: “Absent another constitutional amendment, the Permanent Fund dividend program must compete for annual legislative funding just as other state programs.” Is the Permanent Fund dividend what individual Alaskans got as a trade when the Statehood Act reserved to the State of Alaska the mineral rights to the lands granted by the federal government under the Statehood Act? No. The Permanent Fund dividend arose as a possible option more than 15 years after Congress adopted the Statehood Act in 1958. The Statehood Act provides that the “mineral lands” granted by the federal government to the State of Alaska pursuant to statehood are granted under the express condition that all sales, grants, deeds, or patents of those lands must be reserved to the State. This provision means that Alaskans cannot receive royalties as individual landowners from development of those mineral lands. The House Finance Committee adopted a letter of intent in 1982 regarding the legislation creating the Dividend that included the statement, “The Committee recognizes that virtually all the petroleum development in Alaska has occurred on publicly owned lands. This is in sharp contrast to other states, where vast accumulations of wealth have accrued to private landholders.” ^ Cliff Groh was the legislative assistant who worked the most on the bill in 1982 that created the Permanent Fund dividend we have today. He is also a lawyer who has litigated constitutional issues. Some material here overlaps with a chapter he co-authored with Gregg Erickson for the book Alaska’s Permanent Fund Dividend: Examining Its Suitability as a Model.

GUEST COMMENTARY: What were the original arguments for Permanent Fund dividends?

Editor’s note: This is the first in a series of pieces from Cliff Groh covering the history of the Permanent Fund dividend. I was the legislative assistant who worked the most on the bill that created the Permanent Fund Dividend in 1982. Advocates of the dividend offered essentially five rationales during consideration of the legislation that put in place the “equal payments for all” program we have today. The per capita dividend adopted in 1982 was the result of a bill that served as a backup — or backstop — for the original “the longer you’re here, the more you get” dividend created by a law passed in 1980 that quickly became stalled in litigation. The Alaska Legislature passed the bill providing for the per capita dividend as a backstop 11 days before the U.S. Supreme Court struck down the original dividend bill as unconstitutional, and so the first dividends were paid in the summer of 1982 under the backstop bill. The five arguments for per capita dividends made at the creation were: 1. Paying dividends out of the Permanent Fund’s income or earnings would build a political constituency to protect the Permanent Fund’s principal against raids by special interests. The logic: The bigger the Permanent Fund, the bigger the Permanent Fund dividend. A variant of this argument was that the dividend would strengthen political opposition to pork barrel spending and budgetary hypergrowth. 2. Paying dividends would provide greater economic “bang for the buck” than spending the same amount of money on the operating budget, capital projects, or loans to residents. A related argument was that compared to the alternatives, dividends would more efficiently allocate the surplus oil money coming into the State of Alaska’s coffers in the early 1980s. 3. Individuals have a right to use a portion of their oil wealth. This argument’s supporters pointed to the Alaska Constitution’s statement that “The legislature shall provide for the utilization, development, and conservation of all natural resources belonging to the State, including land and waters, for the maximum benefit of its people.” Legislators recognized this individual entitlement to state-owned natural resources by adopting findings to the 1980 dividend bill stating that the legislation “fairly compensates each state resident for his equitable ownership of the state’s natural resources….” (The legislation in 1982 that created the per capita dividend we have today had no findings, however, as some legislators considered such philosophical statements too controversial to include in the bill.) 4. Permanent Fund dividends would deliver benefits more equitably than alternative uses of the surplus oil money. Gov. Jay Hammond — the most important supporter of dividends — contended that the powerful and well-connected were already benefiting from the state’s oil wealth through special-interest appropriations, often arranged behind closed doors. The repeal of Alaska’s personal income tax in 1980 further tilted benefits towards higher-income people, some of whom were non-residents. The state’s highly subsidized loan programs were also cited as examples of inequitable distribution. As I noted in a document circulated in the Legislature during the 1982 session, per capita Dividends by contrast “treat all Alaskans alike — whether they are rich or poor, or whether their home is Adak or Anchorage.” 5. Universal direct distribution of a portion of the Permanent Fund’s income would fortify the safety net for low-income Alaskans. Hammond never thought much of this argument, but legislators concerned over what seemed to them a possible perverse effect inserted “hold harmless” provisions in the 1982 legislation authorizing use of the state’s General Fund to offset loss of federal needs-tested benefits caused by receipt of a Dividend. Which arguments make sense now? Cliff Groh considers his work on the 1982 Permanent Fund dividend legislation perhaps his most interesting, challenging, and fun job ever. Some of this material overlaps with a chapter he co-authored with Gregg Erickson for a book published in 2012, one of four chapters Groh has authored or co-authored in academic books about the Permanent Fund dividend and Alaska fiscal policy.
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