Dunleavy’s plan for PFDs collides with law designed to protect Alaska Permanent Fund

The Alaska Permanent Fund Corp.'s exterior sign, March 14, 2016. (Photo by Skip Gray/360 North)
The Alaska Permanent Fund Corp.’s exterior sign. (Photo by Skip Gray/360 North)

Gov. Mike Dunleavy’s proposed state budget does something Alaska hasn’t done before: it draws more than $3 billion more than planned from the Alaska Permanent Fund. That puts the budget on a collision course with a state law intended to build the fund in the future. 

Dunleavy said Alaskans — and Alaska’s economy — would benefit next year from receiving full permanent fund dividends under the formula in state law. That’s projected to be more than $3,000.

And he wants to pay out an additional $1,916 to make up for what Alaskans would have received this year in PFDs had the state followed the formula. 

All of that money would be in addition to what the state already planned to draw from the Alaska Permanent Fund’s earnings reserve. The governor said it’s a one-time solution.

“So I want people to understand that this is not going to be a situation where my administration is going to go to the earnings reserve of the permanent fund on a consistent basis to pay for large outlays,” he said. “But this year is different. This year we need to get this economy back up off its knees and on its feet.”

This year is different. 

But what’s not new is that this is the seventh straight year there’s a gap between what Alaska would spend and what it’s bringing in. And what’s been in the state’s main piggy banks to close these gaps — the constitutional and statutory budget reserves — is down from nearly $18 billion combined in 2014 to roughly $1 billion left in the Constitutional Budget Reserve Fund today.

That leaves the earnings reserve as the last account left. 

Alaska Permanent Fund Corporation CEO Angela Rodell stays away from budget politics. But more than a week before Dunleavy introduced the budget, she laid out the stakes of overdrawing from fund earnings. 

“We just have to recognize that if we want to have a robust, stable revenue source for multi- years — to take care of our kids, to take care of our grandchildren, to support the state, then we need to be conscientious about how we use the fund, and be very prudent in our spending,” she said at a presentation to the Greater Fairbanks Chamber of Commerce on Dec. 1.

The emphasis on prudence was behind the law the Legislature passed two years ago that limits draws from fund earnings to roughly 5% of its market value. 

The market value is calculated on an average over five years. That limits the impact of something like what’s happened over the past nine months, when the fund’s value rose from $60 billion after the pandemic started to more than $72 billion on Monday.

Rodell said it would be unfortunate for the state to go down a different path than the one laid out in the law. 

“The state can pay a full PFD. Or it can pay for other essential services,” she said. “But it can’t do both at the full rate it has been. ”

But the governor’s budget tries to do both. Although it does include some spending cuts, they’re not on the large scale he proposed two years ago. 

Dunleavy didn’t say last week how he would close most of the $2 billion gap in the budget that would still exist after this year. He did lay out one major proposal — changing the formula for the dividend. 

In the existing formula, dividends are half of the fund’s average recent earnings growth. When times are good, dividends are high. During periods with long down markets, there are smaller dividends.

The new formula wouldn’t be based on earnings growth. Instead, it would be based on a share of the annual draw. That draw is based on the fund’s overall market value, including both earnings and the fund’s constitutionally protected principal. It won’t go up and down as much as the current formula. Dunleavy wants it to be at least half of the draw.

The change would be subject to a vote of the people of Alaska, through a proposed constitutional amendment that would enshrine the PFD in the constitution. It doesn’t currently have that protection.

The change would reduce dividend payments by an estimated $427.2 million the first year, in the fall of 2022. It would reduce individual dividends by a little more than $600, leaving them at an estimated $2,300 to $2,400.

But that’s for the future. This year, Dunleavy’s plan for two PFD payments would drain more than $3 billion from the fund, beyond the $3 billion that was planned. 

Finance experts have pointed out that every dollar taken from the fund beyond what’s planned will reduce the fund’s earnings forever. For example, the annual earnings growth lost from an unplanned $3.2 billion draw at 5% growth would be $160 million.

Dunleavy said the people of the state should be able to weigh in on any long-term budget solution. Besides enshrining the PFD, he has two other ideas for amending the constitution. One would require the public to vote on new taxes, and the other would lower the limit on how much the state can spend. 

“Just like what happened decades ago, that gave us the permanent fund. That allows us to have this discussion today. The very people of Alaska voted on that permanent fund. We all think that was a wise idea. Why not give them an opportunity to vote on how they want to be taxed, if they do?” Dunleavy said. “What changes to the permanent fund, if any, that they would agree to? And in terms of spending limits, why not engage the people of Alaska?”

The proposal faces an uncertain reception in the Legislature. 

The day the budget came out, one of the current leaders in the Legislature says he expects the plan to meet strong resistance.

House Speaker Bryce Edgmon, a Democratic-endorsed independent from Dillingham, said some lawmakers want to pay as large a dividend as possible. 

“But, the question before us — and I think in front of all of Alaska is — do we spend down the earnings from the permanent fund to meet today’s costs, at the expense of tomorrow’s generation?” he said. “Where there may not be a permanent fund dividend, where you may compromise the earnings of the permanent fund, because this year was a good year in the earnings, next year may be a not so good year. The year after that could be very poor.” 

The next step in the budget process starts on Jan. 19, when the Legislature reconvenes. 

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