Analysis
FAIRBANKS — For the leaders of the Alaska Legislature, the price of avoiding a negotiated settlement with Democrats over 2 percent to 3 percent of the total budget is the largest internal money transfer in the history of the Alaska Permanent Fund, about $9,000 for every resident of Alaska.
The proposed shift would not reduce the amount of money in the state treasury, but it would place as much as $6.4 billion into the principal of the fund, where it could not be used to pay for state government operations, only placed in income-producing investments.
House Bill 2002, introduced Tuesday, would solve an immediate political problem by limiting the state's financial options for the future.
In a letter Thursday, House Speaker Mike Chenault and Senate President Kevin Meyer said their organizations "have decided to deposit $4.9 billion" into the principal of the Permanent Fund.
"We end the hostage situation and are not forced to increase spending by a minority group of legislators," they said of their plan.
As introduced, the bill includes a $4.9 billion appropriation on June 30, and a $1.5 billion appropriation on June 30, 2016. It is a constitutional requirement that the Constitutional Budget Reserve cannot be tapped without a three-quarters legislative majority, as long as there is more money available for appropriation this year than last year.
The earnings reserve, which has about $9 billion, including $2 billion allocated for the dividend program and inflation-proofing for this year, is the portion of the $54 billion Permanent Fund that could be used by the Legislature to help pay for government operations, though throughout its history, this part of the fund has been used mainly to pay dividends and to increase the principal to offset inflation.
Transferring billions out of the reserve as a way to avoid the three-quarters vote would "reduce the Legislature's flexibility" to use earnings of the fund to deal with a structural deficit in state government, Legislative Finance Director David Teal wrote in a March 19 memo to lawmakers.
Former Rep. Andrew Halcro said it goes way beyond inflexibility:
"The idea of sweeping 30 percent of your cash reserves off the table in order to avoid spending less than 2 percent of those same reserves, combined with the Legislature's historical aversion to solving the fiscal problem to begin with, is financial suicide for the state."
"Meanwhile, there isn't one lawmaker talking about fiscal policy for the long term, and how we navigate a problem that we predicted 13 years ago, and is only going to get worse," said Halcro.
Halcro, a businessman and the former head of the Anchorage Chamber of Commerce, served in the Legislature in May 2002 and voted for an income tax and other measures to deal with one of the past financial storms that blew over, like many others, when oil prices rebounded. But oil production is much lower today and the revenue gap, excluding the Permanent Fund, is much wider.
Democrats have attacked HB 2002 and said it might lead to lower dividends in the future. Chenault has defended it by saying it would increase dividends.
There are no backup documents on the legislative website explaining the $6.4 billion plan. And public statements justifying the move have been in short supply, except comments by Chenault that his goal is to keep the money from being spent, avoid the three-quarters vote and end the budget stalemate.
"What that does is that takes money off of the table that the Legislature could spend on bigger government and it puts it into the Permanent Fund where it would be protected and it would set there and grow and make bigger dividends," Chenault said Tuesday on the statewide public radio show "Talk of Alaska."
It helps to remember that the fund lost $9 billion in 10 weeks during the financial collapse of 2008. It recovered in the years that followed, but past performance is no guarantee of future results.
In their letter, Chenault and Meyer said they want to make sure that the billions in the earnings reserve is "not squandered by leaders of today and tomorrow. . ."
The 4-day-old bill has had no critical review or external study of how the range of state financial challenges, which go far beyond the dividend, would fare under this plan and what it would mean to Alaska's future.
One example of what's missing is how this would impact the proposed natural gas pipeline or any of the other costly projects on the horizon. It would call into question the most likely source for state pipeline financing, a forthcoming expense estimated at from $7 billion to nearly $14 billion.
In theory, a gas pipeline investment could be made from the principal of the Permanent Fund and meet the constitutional requirement. That idea has been discussed for decades, but it would mean a change in investment philosophy for the fund, which has so far avoided Alaska infrastructure projects with income potential.
Six members of the House majority wrote Chenault last week of their worries about the transfer plan, and "how manipulating these funds now might impact the ability of the earnings reserve to play an effective long-term role in reaching sustainable, balanced budgets and financing a gas line."
Profiting from a long-running bull market, the Permanent Fund has continued to increase in value while oil revenue has dropped.
"In general, large balances in the Earnings Reserve Account cause the amount available for appropriation to exceed the amount appropriated for the prior year, thus preventing simple majority access" to the Constitutional Budget Reserve, Teal wrote.
In a presentation to New York bankers and analysts in February, Gov. Bill Walker included slides showing the earnings reserve remaining at $7 billion to $10 billion over the next five years, a financial backstop providing insurance when other funds are diminished or gone.
That presentation to the bankers showed the Constitutional Budget Reserve, which now contains $10 billion, dropping over the next few years. If oil prices do not rise, the account could be running on empty in two or three years, budget projections show.
Without the earnings reserve to fall back on, the most likely result is that the state will shorten the period before it faces a disruptive combination of an economic slowdown, far larger budget cuts, reduced services and statewide taxes.