Alaska Legislature

The Alaska Legislature is starting a special session on the Permanent Fund dividend. Here are five things to know.

The Alaska Legislature, asked by Gov. Mike Dunleavy to consider his plan for a new Permanent Fund dividend formula, opens a special session on Monday in Juneau.

The stakes are high. Right now, there is no 2021 Permanent Fund dividend, and a long-term change to the formula is likely a necessary precondition for a payment this year.

A dividend agreement may also be necessary to fund college scholarships for Alaska high school students, infrastructure projects in the Matanuska-Susitna Borough, and a variety of other state programs. All were de-funded as a side effect of the extended political debates over the dividend.

Before the session opens, here are five things to know:

1. The dividend formula is the heart of the problem.

Until 2018, the only use of the Alaska Permanent Fund was to pay Permanent Fund dividends. Now, an annual transfer from the Permanent Fund to the state treasury is being used for services as well, because oil prices and production have fallen.

Oil is expected to make up only 28% of the state-funded part of the budget in the coming year. Money from the Permanent Fund makes up about 66%.

The formula traditionally used to set the amount of the dividend was written in 1982 and wasn’t changed when the state began using Permanent Fund money for services. In 2017, the Alaska Supreme Court ruled that legislators and the governor don’t have to follow the traditional formula, and legislators have set the amount manually since then.

In the fiscal year that started July 1, the Permanent Fund transfer will be limited to $3.1 billion, an amount most legislators believe is sustainable.

The traditional dividend formula calls for spending $2.5 billion, enough for payment of about $4,000 for an estimated 630,000 recipients.

The current budget has space for about $537 million in dividends, or about $852 per recipient.

2. There is no agreement on what a new formula should look like.

Dunleavy has called lawmakers into special session to consider a new formula he has proposed to put into the state constitution, guaranteeing annual payments.

The governor’s plan would split the annual Permanent Fund transfer, reserving half for dividends and half for services. The transfer would be permanently limited, to prevent excess spending from the Permanent Fund.

The governor’s proposal would create a payment of roughly $2,350 per person right now, but it would also create a deficit of more than $800 million next year.

For that reason, legislative reaction has been mixed. Many legislators have come up counterproposals, and an eight-member legislative working group has not yet succeeded in writing a compromise plan.

Legislators have different perspectives on what the dividend is, and that has contributed to disagreements on what should be done. In a pair of June discussions, Sen. Natasha von Imhof, R-Anchorage, referred to the dividend as “free money,” and has advocated a smaller payout than the one proposed by the governor.

Rep. Mike Prax, R-North Pole, said the dividend represents a share of the state’s mineral rights, held in trust on behalf of all Alaskans, and it should be paid out like a stock dividend.

Supporters of this interpretation frequently cite a 1992 letter from former Gov. Wally Hickel. That letter, distributed with the year’s dividend, was labeled a “certificate of ownership” and said that “a portion of your oil royalties are also set aside in the Permanent Fund from which you, as an owner, earn dividends.”

In a July meeting of the working group, Rep. Kevin McCabe, R-Big Lake, and Rep. Adam Wool, D-Fairbanks, argued over differing interpretations of the dividend. McCabe said income from the Permanent Fund belongs to individuals, rather than the state, while Wool said the dividend “is a budget item just like education and public safety.”

3. New taxes are under serious discussion, but agreement seems far away.

All of the proposals under serious discussion require additional elements beyond just changing the dividend formula.

To cover the deficit created by his dividend amendment, the governor has proposed temporarily spending more from the Permanent Fund. Members of the House’s coalition majority have rejected that idea.

If an overdraw isn’t possible, new taxes or other revenue will be needed.

Revenue Commissioner Lucinda Mahoney presented several options to lawmakers earlier this month, including a 4% state sales tax, which her department estimates could raise as much as $1.3 billion per year. Sen. Bill Wielechowski, D-Anchorage, has repeatedly suggested raising oil taxes.

Wool, of Fairbanks, has suggested a dividend boosted by a statewide income tax, as have other House Democrats.

But in an interview this week, Dunleavy said he would not accept taxes without action on other constitutional amendments he has proposed. Those amendments — a tighter state spending cap and voter approval of new taxes — have not advanced because they lack sufficient support in the Legislature.

If there is no agreement on taxes or a Permanent Fund overdraw, there is unlikely to be agreement on a new dividend formula.

The lone dividend plan that has received serious consideration and does not require additional taxes or budget cuts is the one from von Imhof. It would set aside money from the Permanent Fund into a special dividend-only investment account to pay a small dividend that would grow over time.

Sen. Lyman Hoffman, D-Bethel and a member of the eight-member working group, has said a dividend of the size created by von Imhof’s plan would likely be unacceptable to the Legislature.

4. The Permanent Fund has enough money to pay for a big dividend now — but that has consequences.

In the fiscal year that ended July 1, the Alaska Permanent Fund was worth more than $81 billion. Most of that money is constitutionally protected and cannot be spent, but about $9.3 billion is uncommitted and available.

Spending from the fund reduces the amount of money available to invest, thus reducing the amount available in the future for dividends and services. For that reason, many lawmakers are reluctant to spend more from the fund.

“Every dollar that you pull out is a dollar that isn’t earning interest,” said Sen. Shelley Hughes, R-Palmer, on statewide public radio last month.

Spending $630 million from the fund — equivalent to $1,000 per 2020 dividend recipient — means losing $2 billion in value by 2041.

They’re also haunted by the recent past. Since 2014, lawmakers have spent more than $16 billion from state savings accounts, and they worry that overspending will set a precedent that encourages future lawmakers to similarly exhaust the Permanent Fund.

5. A final resolution likely requires voter approval.

In order to keep future legislators and governors from repeatedly debating the amount of the dividend, many lawmakers believe the ultimate solution will involve enshrining a formula in the state constitution, whether by passing Dunleavy’s amendment or another proposal.

Doing so requires a supermajority in the state House and Senate, then voter approval at the 2022 general election.

That’s adding to the pressure on lawmakers.

“I’m concerned that if we put something on the ballot in November 2022 and it fails, we will be in a dire situation,” Hughes said. “It must be fair and reasonable to the public, or it will fail at the ballot box.”

Sponsored