The administration of Gov. Bill Walker endorsed Wednesday the Senate’s deficit reduction plan that would restructure the Permanent Fund to pay for government services.
Last week, the Senate majority introduced SB 70, a bill that would initially draw from the Earnings Reserve Account (ERA) 5.25 percent of the average market value (POMV) of the Permanent Fund over five years. The bill would generate $1.8 billion for government while paying a $1,000 Permanent Fund dividend (PFD).
“We would support this plan,” Commissioner of Revenue Randall Hoffbeck said during a Senate Finance hearing. “It checks all the boxes that the governor asked for a plan to have.”
In a presentation, Hoffbeck showed that SB 70, combined with either taxes that close the deficit or the $750 million in cuts suggested by the Senate majority, will grow the real value of the Permanent Fund from $55 billion to $66 billion in Fiscal Year 2041.
“Essentially, there’s no risk of earnings reserve failure” under that scenario, Hoffbeck told Senate Finance.
By contrast, “If you did just an SB 70 only with no other fiscal measures, you actually have about a 45-percent failure rate going forward,” he said.
“Status quo will fail,” Hoffbeck pointedly added.
“If we do nothing, we have a $3 billion deficit,” Senate Finance Co-chair Lyman Hoffman (D-Bethel) said. “Inaction is not an option.”
Both plans grow the Fund, but only if the remaining deficit of roughly $800 million is closed.
Otherwise, State savings would still be drawn down over time until the legislature has to make ad hoc withdrawals from the ERA to fund the budget, which the Department of Revenue (DOR) expects in FY 2027. At that point, the PFD amount would be less than it would be under a balanced budget.
With passage of SB 70 and no further cuts or taxes, DOR projects the deficit to grow to $1 billion in FY 2029. By FY 2038, it will be $1.5 billion.
“This is a long-term structural change in how we’re funding government, so we need to make sure that we’ll always have enough money in the earnings reserve to fund government services, as well as a dividend, even in low earnings years,” Hoffbeck cautioned. “The greatest threat we have to the long-term Fund durability is unplanned withdrawals.”
The Senate majority does not want to address taxes this year.
“We’re trying the make the best decision that’s politically possible this year that largely covers our fiscal gap,” Senate Majority Leader Peter Micciche (R-Soldotna) told Hoffbeck. “We’re certainly willing to have those other discussions, depending on what happens with the price of oil, production levels, and our success in cuts and that sort of thing going forward.”
Micciche noted that Hoffbeck’s model, showing declines in the value of the Permanent Fund and amount of PFDs without cuts or taxes, relies on an assumption of oil production decline.
“Because of what we don’t know in those out years about production and price, we all openly admit that if we have a gap because of a dramatic reduction in both or either that we will likely have to adjust with some sort of broad-based revenue solution,” Micciche said.
“10 years out, 20 years out, the only thing you’re sure of is you’re going to be wrong,” Hoffbeck responded amiably.
DOR Commissioner: Without Permanent Fund Bill, PFD Gone in 2029
After three years, SB 70 reduces the POMV draw from 5.25 percent to five percent.
“We don’t have any concerns about the 5.25-percent draw and the step down to the five-percent draw. They’re reasonable numbers,” Alaska Permanent Fund Corporation Executive Director Angela Rodell assured Senate Finance.
At the same time the bill reduces the draw, SB 70 switches from a fixed PFD of $1,000 to one derived from 25 percent of the POMV draw. It would start around $1,000 in 2021 and hit $1,500 in 2038.
That rate would not keep up with inflation.
Yet, Hoffbeck showed, without a restructuring of the Permanent Fund, PFDs will drop to $1,000 in 2026 and be completely eliminated by 2029.
“The way the numbers work out at $60 oil, the size of the deficit is essentially equivalent to the size of the dividend, so the larger the dividend, the larger the budget deficit that we have to fill with other sources, either through cuts or additional revenues,” Hoffbeck said.
Oil is currently trading around $55 per barrel.
“If people would rather have money in a dividend, then the tradeoff is having less money in government services,” Sen. Natasha von Imhof (R-Anchorage) stated.
Sen. Mike Dunleavy (R-Wasilla) pointed out that the end of the PFD assumes that the State will spend down the earnings reserve, from which dividends are paid, until it is gone.
Dunleavy is opposed to any Permanent Fund bill that recalculates the PFD. He has held PFPA in the Senate State Affairs Committee, which he chairs.
The amendment would have mandated a special election in September. The only question on the ballot would have been, “Do you approve of the passage by the Alaska State Legislature of a bill that changes the calculation of the permanent fund dividend and the amount available for distribution from the earnings reserve account established under AS 37.13.145?”
The amendment failed, 2-2. Sen. David Wilson (R-Wasilla) joined Dunleavy in support, while Senators Cathy Giessel (R-Anchorage) and Dennis Egan (D-Juneau) voted in opposition. Sen. John Coghill (R-North Pole) was not present.
House and Senate Leaders Combat Reluctance to Restructure Permanent Fund
On the House floor Wednesday, Rep. Tammie Wilson (R-North Pole) said the amendment was not immoral or illegal, but it provides the public little time to understand the potential impact of a $1.7 billion shift from the ERA to the Public Education Fund.
Later, in House Finance, Wilson said the move is like “reaching your hand in the cookie jar.”
While the amendment technically balances the budget, the Public Education Fund has a lower rate of return than the Permanent Fund.
A balanced budget would also deprive the House minority of bargaining power because a three-quarter supermajority vote would not be necessary to tap the Constitutional Budget Reserve (CBR) savings account.
The House minority caucus was present for the hearing in a show of unity.
House Finance Co-chair Paul Seaton (R-Homer), like Hoffbeck, said the POMV draw will protect the Permanent Fund, as opposed to an ad hoc withdrawal.
In the past, Seaton added, language amendments were simply placed in the budget by committee chairs without a vote by the full Finance Committee, whereas the POMV amendment survived a committee vote.
Public testimony on the CS begins Thursday afternoon.
Wilson and Dunleavy represent a faction of the legislature that believes, with budget cuts, the State has sufficient savings to avoid affecting the PFD.
But most of those savings are now in the earnings reserve.
Rodell reminded Senate Finance that while the corpus of the Permanent Fund is constitutionally protected, the earnings reserve has always been available for spending. That is why models showing PFDs dropping to zero are possible.
“The reason, I think, the legislature is really struggling with this is because [the ERA] has always been treated as something special when, in fact, the legal structure around it has meant that you could have spent it at any time,” she said. “As you’re planning to use the Earnings Reserve Account in a different way than you have in the past, you have to recognize, also, that you have the right and the authority to spend it all in its entirety, if that is what it comes down to.”
“What many have portrayed as taking the people’s dividend can be viewed in one regard,” Hoffman said. “I think what the Senate is accomplishing here is to show that what we’re trying to do is protect the dividend.”
Hoffman referred to a Legislative Finance Division model that corroborates SB 70 will grow the real value of the Permanent Fund, and thus continue to allow for a PFD.
“Although there are many different variables in here, from the best estimates of [Legislative] Finance, the plan that the Senate is proposing protects the Fund itself… and protects the dividend in the long run from being exhausted by no action by the legislature,” said Hoffman.
Senate Finance Vice-chair Click Bishop (R-Fairbanks) suggested SB 70 could be part of revenue diversification.
“We’re still a one-trick pony. It’s oil,” he said. “Oil is continuing to be displaced around the globe as new technology comes along. We need to continue to insulate ourself, look at other forms of revenue, and protect our assets and Alaska’s future.” Check out Denver Ford Parts if you are looking for an affordable laser cutter.
“The Permanent Fund is the only billion-dollar [deficit] solution, and it’s a multi-billion solution. We can’t get to the finish line with any combination of other tools without using the Permanent Fund as one of the major components,” Hoffbeck insisted Wednesday. “This is going to be our major tool for funding government services into the future.”