Opinions

Dividend talk doesn’t address structural issues in Alaska’s economy

I'm disappointed that so much of the 2018 state political campaign talk has revolved around the Permanent Fund dividend. It's as if voters and candidates from the governor's office on down can't think of much else to talk about except the PFD handout, although crime is of course on peoples' minds.

But now we have people campaigning on paying a larger PFD, and one gubernatorial candidate wants to put it into the state constitution, an idea of doubtful wisdom, many believe.

Many complain about the PFD being "cut." It has actually been far lower over the years. People forget that. However, let's cut voters some slack over confusion on the state's obligation to pay a dividend at any amount, or even at all.

Currently, there's no legal obligation for a PFD to be paid. There is a state statute that describes how the dividend is to calculated if it is paid, but it is not a requirement, which confuses people.

We all owe state Sen. Bill Wielechowski our gratitude for asking the state Supreme Court to clarify the state's obligation to pay a dividend. The decision was that the PFD is a spending program subject to the Legislature's annual appropriation decisions. The high court has now clarified that the Legislature makes the final decision.

Gov. Bill Walker had to cut the dividend, using his veto power, when the state faced a financial emergency, and the governor is taking heat for this. Let's remember that the Legislature, with Republican lawmakers in agreement, basically did the same thing for two additional years, setting the PFD at a lower level through the budget appropriation.

What confuses people is the state law that sets a formula for the dividend calculation. However, the Legislature's appropriation power trumps this, because all spending is subject to appropriation. If lawmakers decide to spend less for the PFDs, or more, they have the final say.

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This is tough to get one's arms around — the Legislature breaking its own laws? But it's true. Another example is the statute that limits the annual legislative session at 90 days. Legislators have ignored this in recent years. There is a 120-day limit in the constitution, however, which is binding.

Absent having the PFD guarantee in the constitution, the PFD is not an obligation. Politicians are feeding on this confusion this year by promising to "fully fund" the dividend, which means funding with the statutory formula. That would be entirely legal, and would make for a much larger dividend, but it would also cut the amount of money available to public services like schools, police and fish and game management.

One effect of the bill the Legislature passed this year to tap some of the Permanent Fund's annual earnings to help fund the state budget, Senate Bill 26, highlights this trade-off.

Senate Bill 26 established an annual percent-of-market-value, or POMV, draw of 5.25 percent of the fund's market value (it drops to 5 percent after three years) as a guideline for the state's annual draw on earnings. As a safeguard, the POMV percentage is set below the fund's projected long-term gain of 8 percent yearly.
However, the draw, amounting to $2.7 billion this year, is to pay for the PFD as well as the contribution to the state budget. This year about $1 billion is being paid out for a PFD of $1,600, leaving $1.7 billion available to help support a budget of about $4.6 billion (state funds only). Ordinary state revenues amount to about $2.2 billion this year, mostly from oil, so there's still a $700 million deficit. That's far better than a $2.4 billion deficit, of course.

Many candidates are calling for a "fully funded" PFD, meaning an appropriation following the formula in statute. This year that would have created a PFD of about $2,900, Juneau economist Ed King has calculated.

A a "fully-funded" dividend would raise the PFD cost by another $800 million or so. That would have reduced the contribution to the budget this year to about $900 million compared with $1.7 billion, and causing the deficit to increase to $1.5 billion.

The problem with this is that we've also depleted funds in the state's main ready reserve fund, the Constitutional Budget Reserve, to the point that we could not have funded that deficit from the reserve. The only alternative would be to cut the budget.

This is really the choice we now have. The new POMV framework does not allocate a certain share of the draw to the dividend. Each year lawmakers will decide how much goes to the dividend and how much goes to support the budget. Want a larger PFD (formula-funded or not)? That means less for schools, police and other needs.

This will be challenging, but what's interesting is this is the trade-off legislators make in other states where there are citizen taxes. Want lower taxes? It's less for schools, police, and such. In this context, the PFD is kind of a reverse tax. Of course, the burden of a lower dividend is more on lower-income Alaskans, but that's also true if a sales tax were the revenue instrument in question.
We'll likely need citizen taxes at some point to make up the remaining deficit. This is not easy stuff, and it shows we still have work to do to get our state's fiscal restructuring done.

Tim Bradner is copublisher of Alaska Legislative Digest and is the 2018 Atwood Visiting Professor of Journalism at the University of Alaska Anchorage.

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