The Heat is On
Dear Friends and Neighbors,
The Nitty Gritty
The heat is on. The budget finance subcommittees are in full swing and bills are moving. Not to beat a dead horse, but the main issue this year is the budget, and we are currently reviewing the Governor’s proposal to change the Permanent Fund Dividend. Touching the PFD has traditionally been a political no-no. But historically we haven't seen these kinds of deficits. Most Alaskans seem to agree that to solve the problem we are going to have to use a mix of new revenue, government cuts, and draws on Alaska’s savings accounts including the Permanent Fund earnings reserve. Exactly how much of each of those solutions we will draw on is the crux of the debate.
The Governor's proposal was sent to the legislature as Senate Bill 128. His proposal is the most significant change to the Permanent Fund since it was created by Governor Jay Hammond in 1976. In order to maximize public participation, the Senate State Affairs committee has scheduled public testimony on Thursday, February 4 beginning at 5:30 p.m. so that you can weigh in on Gov. Bill Walker’s proposal to restructure the Alaska Permanent Fund.
You can testify in person at your Legislative Information Office (LIO). Locate an LIO by calling (907) 465-4648 or visiting http://akleg.gov/lios.php. If you aren’t able to call in, please contact Senate State Affairs Chair Senator Bill Stoltze’s office at (866) 465-4958 in advance of the hearing to arrange to testify by telephone. There are a limited number of phone lines to the Capitol; so it would be best to go to the LIO. A lot of people are following this, so the crowd at the LIO might be fun!
So what would this change?
It is pretty complicated stuff. I gave the Legislative Finance division a call. First of all I’m pretty sure the hold music at the legislative finance division hasn't changed since the early 1990s. Second the folks over there were very helpful in explaining what the system is now, and how the Governor’s proposal would change it. Now it’s the legislature's job to decide if it is acceptable.
Follow the money
Right now when oil revenue comes in a little piece, 0.5% (just half a cent) of each dollar, must go to the public school trust fund, and about 30% goes to the permanent fund, the rest goes to the general fund.
The Permanent Fund principal is approximately $45 billion. Whether it’s a family savings account or a behemoth fund like the PF, savings generate earnings. The Permanent Fund generates earnings from interest and investment. Through the Permanent Fund Alaska earns money on an annual basis, and that money is used for dividend checks, and to inflation proof the Permanent Fund principal.
The general fund is the state's checking account. We use this fund to provide state services like education, public safety, and transportation, just to name a few. The general fund gets its money from a portion of the oil royalties, from 100% of the production taxes, and from “less volatile revenue.” Right now the general fund has $1.8 billion in it. The state budget is likely to be around $5.3 billion. You can see the problem.
If there isn't enough money to cover the budget in the general fund, the legislature can draw money from the state’s savings account, the Constitutional Budget Reserve (CBR). The CBR has $6.6 billion in it.
A draw requires a three quarter vote in the house and the senate. The CBR gets money from settlements of disputes about mineral-related income, plus investment earnings. Drawing from the CBR creates a liability that must be repaid to avoid general fund money being swept into it. That isn’t likely to happen for a while.
There is another savings account, the Statutory Budget Reserve, established in 2013 after the CBR had been repaid from earlier draws, and was set up as a savings account for surpluses. The Statutory Budget reserve is empty as of last year. The legislature spent it all to cover the budget.
The Governor's plan
The Governor proposes that the legislature change the cash flow. He wants us to change the royalty percentages going to the different funds, instead of about 30% of oil royalties going to the PF principal, he would like us to cap it at 25%. The additional 74.5% would go to the general fund. (Remember 0.5% goes to the public school trust fund.)
The governor also proposes that we should re-route oil production taxes. Instead of going to the general fund as they do now, 100% of oil taxes would go to the PF earnings reserve account.
The Permanent Fund earnings reserve would become the primary source of funding for the general fund, and by extension state government. Instead of relying on more volatile funding sources like royalties and production taxes, Governor Walker wants to create a fixed “sustainable draw” from the earnings reserve to the general fund. It would be set at $3.3 billion. The goal would be that once the changes were made to how the money flows, the earnings reserve would have enough money for four “sustainable draws,” or approximately $13 billion.
Under Walker’s plan, in addition to disbursing dividends and inflation proofing the PF principal, the earnings reserve would now also be the primary funding source for Alaska’s government.
Finally and probably the most controversial element of the governor’s plan….a change to the PFD calculations. The calculation is how the state decides how big your annual check will be.
The Governor wants the legislature to cap the 2016 PFD check at $1,000 per eligible Alaskan and to change the calculation for all future dividends. Right now the check is based on 21% of 50% of a five year average of permanent fund earnings.
Last year’s check was $2,072
About $13 billion x .21% = about $2.7 billion ÷ 2 = $ 1.373 ÷ all eligible Alaskans = $2,072.
The Governor wants to change the calculation for the dividend to be 50% of the previous year’s oil royalties. So if a given year's royalties were $2 billion, the dividend would be about $1 billion divided by all eligible Alaskans.
Previous years royalties ÷ 2 ÷ all eligible Alaskans
Last year’s royalties were about $1.6 billion. Based on that math, if his proposal was in place this year, the dividend check would be about $1,230.
Thank you for reading this, these are big changes and they are not a cure all. Even with all of the Governor’s measures there would still be a deficit of $440 million in FY17.
The Senate State Affairs Committee is your first chance to weigh in. You can also fill out my survey to let me know what you think we should do.