Gov: ‘No other choice’ but to fix budget, PFD this year
Gov. Mike Dunleavy insists he will do what it takes this year to solve the state’s fiscal dilemma that has led to a nearly decade-long run of budget deficits.
That starts with legislators agreeing to start splitting the roughly $3 billion in annual Permanent Fund revenue evenly between the dividend and other government expenses now, which would result in roughly $2,300 PFDs, before his compromise plan to put such a “50-50” fund earnings split into the Alaska Constitution is acted on, the governor said during a June 7 phone conversation with the Journal.
“I think it would be a tremendous step forward if they were talking about a 50-50 because that’s the mindset that I think people need to get around. When I talk to the people of Alaska, what they’ve said to me is, they don’t think that it’s fair for the government to take more out of the Permanent Fund dividend than what they get,” Dunleavy said.
He also acknowledged there is discussion among lawmakers of a smaller, negotiated dividend amount as has been done in recent years to limit damage to the state’s dwindling savings and avoid overdrawing the Permanent Fund Earnings Reserve Account.
The Senate Finance Committee approved an operating budget that would fund PFDs in the $1,000 per person range at a cost of $674.9 million from the General Fund. The $2,300 per person PFDs adopted — almost literally at the last minute — by the Senate during floor debate on the budget would cost roughly $1.5 billion and result in what many legislators fear would be a precedent-setting overdraw of the Permanent Fund.
Another stalemate in the Legislature over the size of the PFD has left the fiscal year 2022 state budget unresolved into June, again leading to the prospect of layoff notices for state workers and bringing on the threat of a July 1 government shutdown.
Some legislators feel the result will be a truce over dividends of about $1,000 to narrowly avoid a shutdown, as has happened in years past, but the political dynamics aren’t all the same. More legislators who, like Dunleavy, previously demanded dividends according to the formula in statute have initially backed the 50-50 concept, potentially making larger PFDs more likely this year than in the past.
Dunleavy said he has offered any resources his administration can provide legislators to reach a resolution on the budget, noting he is back in Juneau to talk with them, but he is not injecting himself into their negotiations. He feels a compromise can be reached soon.
“We’re looking at next week,” Dunleavy said June 7. “We have to prepare for the potential of layoffs on July 1; I am still very optimistic that is not going to occur. I think you’re going to see movement this week into next week.”
At its core, the Permanent Fund amendment formally known as Senate Joint Resolution 6 would put the 5 percent of market value, or POMV, annual draw on the Permanent Fund currently in law into the Constitution along with the 50-50 split of the draw.
Doing so would prevent future overdraws from the Fund that could erode its long-term value, but the governor’s plan also calls for a one-time $3 billion “bridge” transfer from the Earnings Reserve to the Constitutional Budget Reserve in separate legislation. The overdraw — which would be the second totaling $4.5 billion if both the Senate’s PFD plan and SJR6 are approved — is necessary to provide the state with a couple years of reserves while ways to close the rest of the budget deficit are hashed out, according to Dunleavy.
(Editor's note: Office of Management and Budget Director Neil Steininger said after publication of this story that the adminsitration is requesting $3 billion from the Permanent Fund beyond the annual 5 percent draw. If the Senate's plan for $2,300 PFDs is ultimatley approved by the full Legislature, the governor will reduce his current request for a $3 billion transfer from the fund to the CBR, according to Steininger.)
The CBR, which held nearly $14 billion several years ago, has been reduced to just more than $1 billion, which officials in both the Dunleavy and former Gov. Bill Walker’s administrations have said is near the practical minimum amount needed to manage day-to-day government cash flows and operations.
Dunleavy emphasized a belief that the near-term performance of the Permanent Fund and other state investments has put Alaska in a unique position to take action now, even if it means taking more from the Fund in the near-term than its Board of Trustees and most financial advisors would recommend.
The Permanent Fund had a balance of $77.8 billion as of April 30 with $11.3 billion of realized and uncommitted income in the earnings reserve account. It has since grown to a latest unaudited value of more than $81.3 billion while it started the 2021 fiscal year last July at $65.3 billion.
“The fund has made 25 percent here from the end of last (fiscal) year. Our pension obligations have closed considerably, by billions,” Dunleavy said. “If ever you want to take an opportunity to really fix something forever — you have the assistance of an Earnings Reserve that has grown by billions and billions to do it.”
Many legislators, however, are entrenched in their conviction that the state should not spend beyond the 5 percent draw limit on the Fund, which some also say is too high, because the money spent today cannot provide revenue forever.
Some have said continuing the current situation is even preferable to an overdraw. Based on the Permanent Fund’s historical performance, the combined $4.5 billion in addition to the POMV that Dunleavy hopes to appropriate from the Fund for this year’s PFD and the CBR transfer would generate roughly $300 million per year in annual investment income.
Others remain wary of putting the PFD on the same required spending plateau as education, public safety and the Judiciary.
Senate President Peter Micciche has said he has no interest in the $3 billion transfer because of the forgone revenue, though he supports putting the 50-50 PFD solution in the Constitution.
The governor countered that the state has been forgoing economic opportunities brought by private investors who for years have avoided Alaska because of the ongoing and untenable fiscal situation of state government.
“One just can’t view Alaska solely as the state budget,” Dunleavy said. “That’s part of the problem.”
As for his embrace of the “50-50” PFD after campaigning largely on restoring use of the statutory dividend formula and issuing PFD “back payments” for prior-year amounts cut by lawmakers, the governor said he sees it as a compromise solution after his prior effort to balance the state budget was rejected. His proposed cuts and more than $440 million in vetoes in 2019 were also the primary cause for an ongoing effort to recall him from office.
“I would’ve loved for the Legislature to take a serious look at expenditures and the size of the budget and as you know the first year we did and proposed significant reductions; and once again it was not something the Legislature was significantly interested in,” Dunleavy said.
“Some of us have made significant movement; we just need others to make significant movement.”
He has been consistent in his stance that “the people of Alaska will be the ones to decide in the end,” he added.
Dunleavy has also proposed constitutional amendments that would put a strict cap on state spending and require voter approval of all new state taxes, though they have garnered less attention from legislators.
While it would resolve the PFD, SJR6 would still leave an annual deficit in the hundreds of millions and the exact size of the gap is another cause for disagreement.
Department of Revenue officials have told legislators in recent hearings on the 50-50 plan that when the Permanent Fund’s recent performance, improved oil prices and potential new oil production from North Slope fields under development are factored into their economic models the state’s annual deficit will be approximately $300 million by the time the $3 billion in bridge funding is nearly exhausted in fiscal year 2025.
In that scenario, the state would not need a broad sales or income tax and instead could achieve fiscal neutrality and eventually small surpluses with incremental cuts and revenue measures, according to Revenue Commissioner Lucinda Mahoney.
Administration officials are working on revenue measures to propose during the special session Dunleavy called for August, when he hopes to resolve the remaining budget issues if the Legislature passes some form of SJR6 before the current special session ends June 19.
“We think the gap is close and with the bridge draw on the Earnings Reserve, if we keep our budget in check the growth can be managed with what we have coming out of the Permanent Fund and oil,” he said.
Legislators skeptical of the positive financial outlook contend the state’s oil forecasts have routinely been proven artificially rosy and the financial markets driving the Permanent Fund’s returns are due for a correction.
Leaders of the Alaska Permanent Fund Corp.’s advisory firm Callan said earlier this year that relying on the Fund’s historical return average of nearly 7 percent per year, which underpins the sustainability of the 5 percent annual draw, might be overly optimistic for the future.
Rather, Callan representatives suggested a POMV draw closer to 4 percent per year could be necessary to maintain the real value of the Fund based on their long-term market outlooks.
When asked about the revenue options administration officials are considering, Dunleavy said, “We will let you know in August,” later adding that “It won’t matter if the Legislature decides to add several hundred million (dollars) into the budget because then you’re just chasing revenue again.”
Building support for 50-50 split
Some Democrats in the Legislature also contend Dunleavy did not do enough behind the scenes to gain support for SJR6 before going public with it.
They insist administration officials first asked for support of the 50-50 plan just hours before the May 12 press conference in which the governor unveiled it backed by a nearly all-Republican contingent of legislators, and that they weren’t briefed on the proposal until well after it was submitted.
The requirement for supermajority votes to approve constitutional amendments in the Legislature means at least some Democrat support will be needed to pass SJR6.
Dunleavy’s spokesman Jeff Turner called it a “mischaracterization” of the events in a follow-up email, noting the governor’s staff held meetings with the leaders of the four legislative caucuses prior to the briefing.
“It is important to recognize that three of the four caucus leaders not only attended, but spoke during the governor’s press conference on May 12. In fact, around 20 lawmakers, a third of the entire Legislature participated in the press conference,” Turner wrote.
“Keep in mind that the purpose of a press conference is to make an announcement.”
Whether or not Dunleavy did enough to garner the support needed to pass SJR6 in the coming weeks as he wants — while also finishing this year’s budget — he said he’s committed to seeing it through before another election cycle in 2022 could grind fiscal discussions to a halt again.
“We’ll take as much time as we need to get this entire thing taken care of this year,” Dunleavy said. There’s no other choice.”
Elwood Brehmer can be reached at [email protected].