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.

10/30/2019 - 9:47am