Is the Permanent Fund the solution to Alaska's budget gridlock?

JUNEAU -- Legislators are deadlocked in the current special session like they were at the end of the regular session, apparently no closer to getting the super-majority vote needed to access the $10 billion in the Constitutional Budget Reserve and balance next year's budget using that rainy day account.

With the Legislature hoping to spend a little more than $5 billion next year with only $2 billion in revenue, it needs $3 billion to balance the budget. But Republicans and Democrats in the Legislature have been unable to agree on a final budget. Their chief negotiators, House Speaker Mike Chenault, R-Nikiski, and Minority Leader Chris Tuck, D-Anchorage, have been blaming each other for the lack of progress.

But the solution they are looking for could be just across town from the Capitol, where the Alaska Permanent Fund Corp. is headquartered with its $54 billion in accounts. The solution is simple but politically dangerous, as the Permanent Fund is considered the third rail of Alaska politics.

But while the Constitutional Budget Reserve requires a three-quarters super-majority to access, of necessity including least some members of the House's Democratic minority, spending a part of the Permanent Fund needs only a simple majority -- 21 votes in the House. That kind of vote would require none of the 13-member minority.

That part of the Permanent Fund is called the "earnings reserve," and under the complicated law governing the fund and its popular dividends, the reserve contains the profits that the fund has earned and from which dividends are paid.

More than $1 billion of that reserve will be needed to pay dividends this year, and more will need to go to inflation-proofing the Permanent Fund to ensure its value doesn't erode over time. The remaining amount available for legislators to spend is about $5.4 billion, said Valerie Mertz, the fund's chief financial officer.

The size of the earnings reserve, which just several years ago was so low there were questions late in the fiscal year about whether dividends could even be paid, has been drawing the attention of legislators seeking to balance the budget.

"It's a high-interest number right now, absolutely," Mertz told the Permanent Fund's Board of Trustees on Wednesday.

Those most interested in tapping the earnings to balance the budget are members of the House and Senate's Republican-led majority caucuses, who hope to pass a state budget without having to negotiate with Tuck's 13-member minority for votes.

The risk is that taking money out of the fund now would lower future dividends.

There have been no proposals made publicly to spend the Permanent Fund's earnings to fund government operations, but Tuck said at a news conference in Anchorage on Wednesday that may be one of the options on the table.

"There are things the majority can do to avoid going into the Constitutional Budget Reserve. The question we had all along was, 'What would they do to try to avoid working with us?'" he said.

As this year's legislative session went on and legislators began to realize just how large the state deficit would be, it became clear that in the House of Representatives, votes from the Democratic minority would be needed.

But Chenault repeatedly refused to acknowledge to reporters that minority votes would be needed to get money out of the CBR.

In March, Chenault told reporters that his caucus wasn't currently looking at spending money from the earnings reserve, but said that they might get forced into it.

Sometime later, he said, "It might be the only option."

There's also another option for using the Permanent Fund to solve the state's budget gap, but without spending Permanent Fund money.

To do that, the Legislature would take some of the money in the earnings reserve of the Permanent Fund and move it to the fund's principal. Those dollars would actually stay invested in the same stocks and bonds they are in today, but the accounting change could be the key to opening the door to the Constitutional Budget Reserve.

Under the Constitution's rules designed to protect the CBR, the Legislature needs a three-quarters vote to get money out of the reserve if they have other money available. If they don't have other money available, they can sometimes tap the CBR with a majority vote. And if the Permanent Fund money is no longer available because it's in the untouchable principal, that might solve the Republicans' problems.

But how such a change would work and be calculated is complicated, and may or may not be able to provide majority vote access to the CBR.

"The Constitution and law are vague, incomplete and contradictory on this subject, so definitive answers are hard to provide," said David Teal, director of the Division of Legislative Finance.

That second option to use the Permanent Fund to tap the CBR has a separate risk: It could threaten not just the size, but the existence of future dividends. Draining the earnings reserve to alter CBR access calculations could mean there's not enough money in the account for dividends some years. And the dividend arrives just before Alaskans vote in the general election.

No one has yet publicly supported such a plan, but Tuck and other Democrats said Wednesday that they've heard "rumors" such a plan is being considered.