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Dunleavy administration presents rosy fiscal picture for PFD plan, but experts say it’s unrealistic

 The Alaska State Capitol
The Alaska State Capitol (KTUU)
Updated: May. 28, 2021 at 4:36 PM AKDT
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JUNEAU, Alaska (KTUU) - After more than a decade of fiscal doom and gloom, the Alaska Department of Revenue is projecting the state could be in surplus in five years while paying a large annual Permanent Fund dividend. Legislators and financial experts say that’s highly optimistic and unrealistic.

Commissioner Lucinda Mahoney of the Department of Revenue said the plan, which calls for hundreds of millions of dollars in unspecified budget reductions and new revenues, is achievable.

“Our revenue environment has significantly improved, largely as a result of an increased balance of the Permanent Fund,” she said. “This is largely due to the significant capital market returns we’ve seen.”

The fund has had a stellar year, increasing in value since last July to over $80 billion on Thursday, according to the Alaska Permanent Fund Corp. The third quarter of 2021 saw the fund grow by almost 23%.

“That will help us to meet our obligations by far,” said Sen. Bert Stedman, R-Sitka, speaking about an annual draw from the Permanent Fund to pay for state services and the dividend.

But he and the Permanent Fund’s managers urge caution.

“We must put this unparalleled growth into context and recognize it is not sustainable,” said Bill Moran, chair of the board of trustees, warning of the risk of a recession. “We must remain diligent in managing and understanding our portfolio risk.”

Mahoney argues the Permanent Fund draw is based on a five-year rolling average that can account for bad years, but said there may need to be adjustments if there was a persistent downturn.

To pay for a 50-50 dividend, Gov. Mike Dunleavy is proposing to overdraw the Permanent Fund by $1.5 billion. He then wants to draw another $3 billion from the Permanent Fund to act as a bridge for several years while legislators debate new revenues.

Stedman said that would be foolhardy, effectively “taking the cream off the top” of the fund and lowering its earning potential in the future.

“When you run your portfolio, you’ll have good years and bad years, but what ends up happening is they both converge to the mean,” he added. “You’re raiding and destroying the future of the Permanent Fund, that’s what you’re doing.”

Other parts of the Dunleavy administration’s fiscal plan are also coming under scrutiny.

Dunleavy took to social media and claimed on Monday that his Permanent Fund proposal could be implemented without the need for a new statewide tax. Brad Keithley, managing director of Alaskans for Sustainable Budgets, doesn’t buy it.

“We absolutely have to have broad-based taxes,” he said.

Sen. Peter Micciche, R-Soldotna, supports the 50-50 dividend model, but said there would be a cost associated with that. He was dubious that dividend amount could be paid without a statewide tax.

“I think it’s unlikely for the actual results to be that favorable,” Micciche said. “And we have seen that time after time after time.”

Keithley, who is against cutting the dividend because of its regressiveness, looked at the department’s projections for state revenues and said the numbers are overly optimistic.

“The oil price assumptions they make, I think, are too high,” he said, pointing to lower price forecasts on futures markets.

There is also projected to be a substantial oil production rise through projects that haven’t been approved yet, Keithley added. If they fall through, that could see state coffers with $1 billion less by the end of the decade than under the department’s forecast.

Keithley summed up the administration’s projection as “aggressive” and a “far stretch.”

Cliff Groh, a retired state legislator who helped create the Permanent Fund, is also dubious about the Dunleavy administration’s rosy fiscal scenarios.

“I just don’t see that,” he said.

Groh, who supports putting a large and sustainable dividend in the constitution, said there is a large and persistent deficit that needs to be addressed.

Where cuts and new revenues will come from to make the governor’s numbers add up is also unclear.

During a Senate Community and Regional Affairs hearing on Wednesday, Mahoney said the department is working on some new revenue ideas but wouldn’t say what they are. She explained the governor wants the Legislature to debate its own ideas first during an August special session.

Administration officials also couldn’t point to where $200 million in cuts would come from over the next two fiscal years.

Sen. David Wilson, R-Wasilla, was skeptical, saying the Legislature should hear the revenue options now as it considers the state’s fiscal picture and how to address the state’s $1.4 billion deficit.

“We can’t just go off of hopes and dreams,” he said.

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