Lawmakers are considering changing how permanent fund dividends are set, as they weigh the size of the state budget.
For the past three years, the state government hasn’t followed the formula to set PFDs that is in state law.
But a few factors have brought the PFD formula to the forefront. One is the election of Gov. Mike Dunleavy, who was elected in part based on a pledge to maintain dividends. Lawmakers also don’t want setting the dividend level to be an annual fight.
There’s also a practical problem. It used to be that PFDs were the only thing that permanent fund earnings would be spent on. With oil production and prices down, the Legislature has turned toward the fund’s earnings to pay for government as well. But without changes to the PFD, dividends could consume the vast majority of the earnings.
Lawmakers also know Alaskans are unhappy with the annual changes, and how the Legislature has not been following the formula established in state law — although the Alaska Supreme Court ruled the Legislature is on solid legal ground in making changes. This concern was heightened by the public backlash to Dunleavy’s proposal to balance the budget purely on spending cuts and transfers to local government.
The dividend formula is now based on earnings. This makes it swing wildly, from $900 six years ago to what would be roughly $3,100 today. Depending on earnings, there could nothing available for dividends if the the fund loses money, or there could be nothing available for the draw to government if the fund’s gains require dividends to be larger than the total draw on the permanent fund.
The Senate Finance Committee’s Republican co-chairs — Sens. Natasha von Imhof of Anchorage and Bert Stedman of Sitka — have raised the possibility of setting dividends as a share of the draw on the permanent fund. This would split the draw between government and PFDs. Since the total value of the permanent fund is much more stable, the draw and dividends would be more stable and predictable.
“If our goal is to stop haggling over the dividend for the next 40 years — as well as protect the permanent fund in the long term and don’t take too much out of it to erode its value — we should start thinking about the split,” von Imhof said Wednesday during a committee discussion of the dividend formula.
The senators also want to protect the roughly $18 billion in the permanent fund’s earnings reserve. Stedman would like to protect that money in the same way the main part of the permanent fund — which is roughly $46 billion — is protected.
The dividend is drawn from the earnings reserve. If the earnings reserve is moved over to the main, protected part of the permanent fund, there wouldn’t be money left for dividends under current state law. But enacting a new formula in a new law would allow the Legislature to both protect more of the money and still have dividends.
Two senators who represent very different parts of the state — Bethel Democrat Lyman Hoffman and Wasilla Republican Mike Shower — both want to see the dividend formula set in the state constitution.
“We will not be able to address those issues that affect my community in the state Legislature, because of the elephant in the room,” Hoffman said. “And the discussion is always going to be: What is going to be the dividend?”
Hoffman and Shower agree on this concept. But they wouldn’t necessarily agree on what would happen once the PFD is resolved. Hoffman said taking dividends off the table could focus the discussion on new revenue to pay for state services. And Shower said ending the annual dividend debate would set a limit on how much the state spends.
“Anything we do (in law) can be simply ignored, and I think you’ll find that the people don’t trust us that way,” he said. “And that is a fundamental problem with government. If you don’t believe that your government is going to do what they say they’re going to do — and we don’t follow the very laws that we make — that’s a problem.”
Von Imhof expressed concern with the senators’ focus on putting the dividend in the constitution, saying it would prioritize one form of spending — the dividend — over others, like education. She said this would make the benefit to individuals from higher PFDs come at the expense of communities.
“I’m very dismayed personally hearing some of the comments here today,” she said. “Because I value both the individual and the community. I value balance between core government services and the dividend. And I value a sane and reasonable size of government.”
If lawmakers decide to split the draw from permanent fund earnings between dividends and government, it’s not clear what the split would be.
If half of the draw goes to dividends, PFDs would be roughly $2,300, and the budget would require $861 million in spending cuts or new taxes.
Stedman said based on what he’s heard from lawmakers, $861 million in cuts isn’t possible.
Anchorage Democratic Sen. Bill Wielechowski said the Legislature could make up that amount through new revenue.
“One of the options that we haven’t talked about is one that I know is politically tough. But it is in option that needs to be looked at. And that is the issue of oil taxes, and the question of whether or not we are getting our fair share for our resource wealth,” he said.
Stedman said making changes to the permanent fund will have long-term effects.
“Hopefully when all is said and done, they’ll look back in history 100 years from now, 50 years from now and realize we made the right decision,” he said.
The future level of dividends could become an important part of discussions between the House and Senate — as well as between lawmakers and Dunleavy — as the Legislature seeks to pass the state budget.