Hopes dim in Alaska Legislature for a Permanent Fund sustainability fix this year

JUNEAU — Alaska lawmakers began the 32nd Alaska Legislature with plans to create a sustainable plan to manage the Alaska Permanent Fund and pay an annual dividend.

But now, for a fifth consecutive year, lawmakers are preparing to set the dividend by fiat. There will be no permanent fix to a problem that has dominated the state’s budget discussion since 2016, top officials say.

“I don’t see it happening this session. There’s not enough time, and it’s going to be very difficult next year, during an election year, to do it,” said Rep. Bryce Edgmon, an independent lawmaker from Dillingham who is one of the top members of the House majority.

Gov. Mike Dunleavy and some Democratic lawmakers have proposed constitutional amendments that call for new approaches to handling the Permanent Fund and the dividend. In the past month, three of those have gained some momentum, but none appear likely to pass the Legislature before May 19, when lawmakers are scheduled to adjourn the regular session.

That means this year’s dividend will be set manually by lawmakers, instead of by formula, and the Permanent Fund as a whole will remain vulnerable to spending by a simple legislative majority and the assent of the governor.

“I would agree that’s the default. That we will go another year without a permanent fix. Which is tragic to me,” said Rep. Jonathan Kreiss-Tomkins, D-Sitka, the author of one of the amendments.

Entering the year, the expectation had been that action was needed promptly to prevent severe budget cuts or major tax increases. The arrival of federal economic aid changed legislators’ willingness to tackle the issue.

“I have noticed one by one, legislators have lost interest in making the difficult decisions necessary to get that done,” said Senate President Peter Micciche, R-Soldotna.

“We will be slapped in the face with the fiscal reality the moment these federal dollars are gone,” he said.

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Two-thirds of the House and two-thirds of the Senate must agree for a constitutional amendment to advance, and any amendment must be ratified in a statewide vote before it becomes effective. The soonest statewide vote won’t take place until next year.

“I think the hardest part is getting two-thirds in both bodies. I think I’m less concerned about getting 50% plus one of Alaskans. My sense is that people realize we have a problem and they want us to frickin’ solve it already,” Kreiss-Tomkins said.

Until 2018, money from the Permanent Fund was used to pay only for the dividend and a few small expenses. In that year, driven by a collapse in oil prices, lawmakers set up a regular transfer from the fund to the state treasury.

That transfer is now the source of almost two-thirds of the state’s general-purpose revenue, contributing more than twice the amount that oil does.

The problem for lawmakers has been — and continues to be — that the transfer is not large enough to pay for budgeted state services and a dividend using the traditional payout formula in state law.

That formula was used from 1982 through 2016 with few modifications. Though it hasn’t been used in five years, it remains in law and is the target by which the state budget is judged.

Without a dividend, the state’s budget is nearly balanced. With the traditional formula, the state has a deficit of about $2 billion.

Lawmakers could simply vote to bypass the 2018 cap and fund the dividend, but doing so would reduce the value of the Permanent Fund in future years and increase the chance that the fund eventually runs out of money for both dividends and services.

Before the start of the legislative session, Dunleavy introduced a constitutional amendment intended to both protect the fund from overspending and reduce the dividend.

As currently written, the proposal would permanently cap the annual transfer from the Permanent Fund and then rely on a new state law to reserve half the transfer for services, the other half for dividends.

“It’s a one for one proposal. Government gets a dollar, the people get a dollar. It’s fair,” said Brandon Brefczynski, a Dunleavy policy adviser.

The 50-50 split, as it is known, is not “hard-wired” into the amendment and the governor is open to changes, Brefczynski said.

If the plan were in place this year, and the number of applicants is the same as last year, the dividend would be about $2,300 per person. The state would also have a deficit of about $1.5 billion, and new taxes or spending cuts would be required to fill the gap.

Micciche has repeatedly endorsed an “all-in” solution that includes the governor’s approach, higher oil taxes, a seasonal statewide sales tax and some budget cuts.

On Thursday, he said that while some lawmakers have abandoned hope for the year, he believes the governor’s proposal, in some form, could advance through the Senate.

“It’s too early to call it dead for this year. Most of the Senate majority remains focused on a durable solution for the dividend,” he said.

Sen. Bill Wielechowski, D-Anchorage, is advancing a competing proposal that calls for enshrining the traditional dividend formula in the constitution.

If the plan were in place this year, the dividend would be about $3,000 per person. The deficit would be about $2 billion.

Wielechowski has endorsed tax increases on the oil industry to pay for the proposal and was a key supporter of last year’s failed oil-tax ballot measure.

He has said that cutting the dividend is a regressive tax because when the dividend is cut, the same amount is taken from every Alaskan, rich or poor, and the dividend makes up a larger part of poor Alaskans’ income.

He believes that if his proposal was on the Senate floor right now, it could get 12 votes, close to the 14 needed for passage.

“I think we’re actually pretty close,” Wielechowski said.

In the House, lawmakers are more pessimistic.

“I can’t imagine that there would be (a fix this year),” said Rep. Andy Josephson, D-Anchorage.

Rep. Neal Foster, D-Nome, said ideas for permanently fixing the Permanent Fund issue have taken a back seat so far to the Legislature’s annual budget debate, but that could change in the House once the state budget passes the House and goes to the Senate.

A constitutional amendment from House Majority Leader Chris Tuck, D-Anchorage, has not had a hearing. The governor’s proposal has been heard once in the House but has not advanced. The idea actually advancing in the House is from Kreiss-Tomkins.

Like the other two amendments, it firmly caps the annual transfer from the Permanent Fund. Unlike the other two, it does not guarantee a dividend.

If Kreiss-Tomkins’ proposal were to come before the full House, it “would result in a free-for-all on the House floor,” Josephson said. “Whether any group of 27 could come out of there, I don’t know.”

House Minority Leader Cathy Tilton, R-Wasilla, said that her group of 18 lawmakers has its own ideas about what constitutes a good fix, but they can’t set the agenda on their own.

She said they will individually make up their minds once a proposal is in front of them.

Rep. Steve Thompson, R-Fairbanks, is a minority member of the House Finance Committee and said he’s still waiting to see both a proposal for a long-term fix and a plan for this year’s dividend.

“We’re still in Never-Never Land,” he said.