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Alaska Senate approves bill to cap the PFD at $1,000 for the next three years

(KTUU)
Published: Mar. 16, 2017 at 1:04 PM AKDT
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A steady stream of state government revenue instead of relying exclusively on volatile oil markets, and $1,000 dividends for Alaskans: that's what a bill approved Wednesday by the Alaska Senate would guarantee.

Senate Bill 26 passed the GOP-controlled Senate 12 to 8 and strongly resembles the Permanent Fund restructure bill that cleared the Senate last year with the endorsement of Gov. Bill Walker but failed to pass the House.

Under the new plan, 5.25 percent of the $57.2 billion fund -- as calculated over a five-year period of time -- would be drawn annually from the earnings reserve account.

Three quarters of the money drawn out would be funneled to government, putting a significantly bigger dent in the $3 billion budget deficit than the proposals to implement an income tax and cut government spending for a third year in a row.

The remainder of the draw would go to pay dividends, which would be locked at $1,000 for three years and are expected to grow slightly thereafter.

Many aspects of the proposal, however, will likely change in the coming months.

One of the biggest riffs is the Senate Republican plan's inclusion of a statutory cap on government spending. While the cap could easily be reversed by a future Legislature, the Democrat-led House is averse to the idea and wants an income tax to be included in the same legislation changing the Permanent Fund, a nonstarter for Senate leadership.

Still, there is broad agreement that the state's oil wealth investment account needs to be tapped this year as part of a solution to state government's fiscal problems.

With a consensus apparently forming, the biggest question now is how to make it so the overhaul does not make the Permanent Fund slowly lose value over time.

THE DRAW

The biggest factor impacting the sustainability of the Permanent Fund under the percent of market value ("POMV") system proposed in the bill that passed the Senate percentage of the fund's earnings drawn out each year.

Throughout the process leading to the passage of S.B. 26, there was intense debate over whether a draw of 5.25 percent is so high that the fund would lose value.

Supporters of the policy change cast it as a necessary response to the state coffers decimated by the plunge in oil prices that began in 2014, and generally as a way of ending the boom and bust economy.

However, dissenting senators in floor speeches said they voted no because they wanted to see other fiscal responses first: oil and gas tax credit reform to make industry contribute more to state government, a broad-based income tax, or a third year in a row of spending reductions.

Revenue Commissioner Randall Hoffbeck pointed to modeling done by his department and from consultants like Callan Associates to argue that 5.25 percent is sustainable. For that to actually happen, the fund would have to grow by an average of 6.9 percent annually.

"The modeling under this bill had a less than 1 percent failure rate," Hoffbeck said, adding that any decision made this year could be revisited. "If at any point in time we feel like it's become non-sustainable, or even if the Legislature feels like it's non-sustainable, we would come back with recommendations for adjustments."

Many senators, even some who voted to pass the bill, expressed concerns about the rate of the draw.

Sen. Donny Olson, D-Golovin, challenged the notion that the rate of the draw is likely to be revisited after it is set.

"The concerns that my constituents have, and I do too, is that there won't be as I put it the political will to go ahead and say, 'Yes, we have something that's too high. We need to cut it back,'" he said.

Sen. Natasha von Imhof, R-Anchorage, voted to pass the bill but during a finance committee said she believed a more conservative rate should be in the final bill.

"I understand the reasoning behind it because it helps reduce the deficit," she said of the 5.25 percent draw. "But I believe it's on the high side, and I would feel more comfortable with 4.75 (percent.)"

"It doesn't take long as you go past four and three quarters (percent) and you've pushed the envelope of the Permanent Fund's ability to inflation proof itself," Sen. Bert Stedman, R-Sitka, said of the draw rate in an interview. "That's a grave concern, that we begin to impair the future earning ability of the Permanent Fund."

Stedman said he is at the tail end of a career in financial services that spanned three decades, and his experience in the industry is why he believes the state would be smart to expect slightly less than 6.9 percent returns.

"In that 30 years, we had Black Monday in 1987. We had the dot-com blowup in 2000. We had the implosion into the Great Recession of 2008, 2009," he said. "That's once every decade over my 30-year career.

"We're going to have financial markets that are going to hit us and hit us hard going forward. There's no doubt about it."

Debate over the draw percentage will continue in the House, and likely when a bicameral conference committee is assigned to sort out differences in the plans approved by each chamber.

Another outstanding question impacting sustainability of the fund is whether or not to put cash from the earnings reserve into the principal of the fund as a means of direct inflation-proofing, something that was done historically except for the past two years.

S.B. 26 does not include any direct form of inflation-proofing and instead attempts to make up for the decreasing value of money over time by drawing out slightly less than the fund is earning.

Rep. Steve Thompson, R-Fairbanks, raised the issue of inflation-proofing in a Monday floor speech as the operating budget was being considered.

When he offered an unsuccessful budget amendment that would have transferred $550 million from the earnings reserve into the principal account, Thompson invoked the first chair of the Permanent Fund board of trustees, Elmer Rasmuson, who said that "inflation is like a thief in the night."

"This body must not fall victim to the belief that we can spend earnings today and yet have a Permanent Fund that remains permanent for our children and grandchildren," Thompson said. "We must uphold our responsibility as trustees to the people and the Permanent Fund by inflation-proofing the principal because if we don't, then it will be the members of this body who truly are the thieves in the night."

THE SPLIT

If revenue is taken from the Permanent Fund earnings reserve, how much should go directly to Alaskans, and how much should go to pay for government?

Debate over how to split the revenue is also expected to continue throughout the legislative process.

The bill that passed the Senate sets the split at 75 percent for government and 25 percent for dividends. Sen. Mike Dunleavy, R-Wasilla, introduced a failed bill that would have made the split an even 50-50, a plan that Stedman and a minority of other senators supported.

The thinking is that Alaskans would be more receptive to use of the Permanent Fund with higher dividends. But of course, as the amount going to dividends increases, the impact on the $3 billion budget gap decreases.

Dissenting lawmakers have also offered this idea: pass a bill restructuring the Permanent Fund, but put the issue to an advisory vote so Alaskans have final say. The Senate voted 8-12 to reject amendment allowing that vote, but that too is likely to be part of conversations moving forward.