GUEST COMMENTARY: Maintaining Alaska’s fiscal system is mathematically impossible
Part 1: What were the original arguments for Permanent Fund dividends?
Part 2: What are the most common misconceptions about the Permanent Fund dividend?
Part 3: How did we get the PFD formula in the Alaska statutes?
Part 4: What are the options regarding Permanent Fund dividends?
Part 5: POMV system vs. dividend formula: something’s got to give
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.