JUNEAU — Despite more than $400 million in budget vetoes, the Permanent Fund dividend plan endorsed by Gov. Mike Dunleavy this year would require lawmakers to violate limits in state law that require sustainable spending from the Alaska Permanent Fund.
Speaking to reporters last week, the governor said he expects that violation to continue only until further budget cuts are made next year. The vetoes announced Friday, however, include one that overturns a plan by lawmakers to constitutionally protect billions of dollars within the fund.
“I think people should be aware that these are unprecedented times, and the intergenerational integrity of the fund is at some degree of risk,” said Rep. Jonathan Kreiss-Tomkins, D-Sitka.
Speaking to reporters on Friday, Dunleavy downplayed that risk.
“We hope that this is going to be a one-year issue in terms of the size of the budget,” he said. “We believe it’s the budget that is what is risking any long-term health.”
The governor has said his intent is to balance the state budget without cutting the Permanent Fund dividend, spending from savings or raising taxes.
His task is complicated by the traditional formula used to calculate the dividend, which doesn’t take into account whether or not there’s enough money to pay it. The formula is based on how much money the Alaska Permanent Fund earns, not how much is available.
This year, paying a dividend using that formula requires $1.9 billion — enough for a payment of about $3,000 for eligible Alaskans. The Legislature hasn’t agreed to that amount, but earlier this year, the governor said he would veto a lesser sum.
Last year, however, lawmakers and then-Gov. Bill Walker approved a law that limits how much money can be spent from the Permanent Fund. In the fiscal year that began July 1, the limit is $2.9 billion, or 5.25% of the fund’s average value over the past few years.
When he signed the budget Friday, the governor approved spending $1.9 billion from the Permanent Fund for government services in the new fiscal year. Add the $1.9 billion to pay a dividend under the traditional formula, and this year’s spending from the Permanent Fund will be $3.8 billion — violating the law passed last year.
“We need to provide for a full PFD, and until that (dividend) statute is changed or until the people of Alaska have a voice in changing that statute, we’ve got two statutes that some say, in some respects, compete,” the governor said Friday of the spending limit and the dividend formula. “We believe that the calculation for the PFD, the decades-old calculation for the PFD still needs to be honored.”
Many lawmakers agree with the governor, but most disagree. In 2017, the Alaska Supreme Court ruled that the Legislature and governor can set the dividend according to the “normal appropriation and veto budgetary processes.”
In the House and Senate, legislators have argued that the dividend should be what’s left over after ordinary expenses are paid. This year, following the governor’s vetoes, that would be about $1 billion, or $1,600 per person, the same as was paid in 2018.
It isn’t a shortage of money that’s driving that argument — the Permanent Fund contains more than enough to accommodate overspending this year — but rather concerns that overspending, if done once, will be done again and again, making the Permanent Fund impermanent.
“The long-term well-being of the Permanent Fund exceeds any one-year dividend,” said Sen. Bert Stedman, R-Sitka.
He laughed when asked whether it makes sense to allow overspending until further cuts come into play next year, under the governor’s plan.
“You could make that argument every year for perpetuity,” he said.
He pointed out that in the past six fiscal years combined, the Alaska Legislature has used more than $17 billion from the Constitutional Budget Reserve and Statutory Budget Reserve to make ends meet. Stedman and others fear the Permanent Fund’s earnings reserve will be the next target for spending.
While much of the fund is constitutionally protected, a significant portion is not. It’s housed in an account called the earnings reserve, which can be spent with a simple majority vote of the House and Senate, plus the approval of the governor. That account pays dividends and (since last year) government expenses.
Stedman and Kreiss-Tomkins each suggested transferring billions of dollars from the earnings reserve into the constitutionally protected part of the Permanent Fund, which would prevent lawmakers from spending it. They succeeded in convincing their fellow lawmakers, who approved shifting more than $10.4 billion.
But when that figure came to the desk of the governor, he cut it by about half. Now, a little over $5 billion will be protected.
“It seems the governor is more concerned about Permanent Fund dividends than where the Permanent Fund dividends come from,” Kreiss-Tomkins said.
A document provided by the governor’s office says the administration believes lawmakers’ attempt to shield Permanent Fund money “reduces the state’s liquidity and ability to respond to future revenue shortfalls,” and “the ability to make statutory Permanent Fund dividend payments may be jeopardized.”
Another document states it more plainly: “This transfer jeopardizes the fund and the future of the Permanent Fund Dividend program.”
Asked whether the transfer would have jeopardized the fund, Permanent Fund Corp. director Angela Rodell answered plainly.
“No. How does it jeopardize the fund?” she said. “It absolutely does not jeopardize the fund. It strengthens the fund, which is why he left $4 billion to go over, and I applaud him on that for not cutting it down to zero.”
Rodell said the Permanent Fund Corp. has not planned for the state to spend $3.8 billion from the fund. That figure is “in direct contradiction” to the law enacted last year, she said.
A $3.8 billion draw, at the current value of the fund, amounts to spending 5.9%, more than the legal limit of 5.25%. According to projections, the fund is expected to grow 6.55% over the next year. If the fund fails to meet projections, its value will fall.
Some lawmakers have already questioned whether the 5.25% limit is too high. Final figures are not yet available for the fiscal year that ended June 30, but through the end of May, the fund had returned only 2.9 percent. While Rodell said June was much better, even without overspending, the fund is only treading water.
“We need to take the long-term view of protecting the Permanent Fund over the short-term gratification of a budget solution in any given year,” Stedman said.