PFD Rewrite is on the Senate Floor
March 13, 2017
Dear Friends and Neighbors,
We’re a little over halfway through the statutory 90-day session, and various solutions to the fiscal crisis have been proposed and considered, all of them involving a restructuring of the PFD. On Friday, the Senate finance committee moved Senate Bill 26 out of committee and was on the Senate floor today with amendments and voting scheduled for Wednesday.   
Sen. Gardner meets with UAA Students in Juneau
Before getting into detail about SB 26, let’s do just a bit of history of the Permanent Fund:
  • The state earns and spends revenue from oil development through: 
  1. Royalties  (about 12 ½ % of the gross value of the oil)
  2. Severance taxes on oil production like ACES or SB21 
  3. Corporate taxes
  4. Property taxes on lands used by oil companies 
  • Created by a constitutional amendment, the Permanent Fund has been the repository of 25% of the 12 ½% of oil royalties, i.e. about 3.12% of the gross value of oil production.  
  • Assets of the Permanent Fund are held in two parts:
  1. The principal, which cannot be spent without a vote of the people
  2. The Earnings Reserve Account (ERA) which is used to inflation-proof the principal of the fund, and for dividends for Alaskans.
Now, having spent all the other billions of dollars of resource development earnings - some invested  wisely to develop a new state, and some squandered in wild schemes or as political favors - the State turns its eye to spending the Permanent Fund earnings for state services.  We still cannot touch the principal itself without the approval of Alaskans to change the State Constitution.
The current value of the Permanent Fund then, created from just 3.125% of all the gross value of resource production, plus increases earned through investments is now at $57  billion, of which $47 billion is principal and $10 billion is the Earnings Reserve Account.  Like any other investment, there have been strong years and weak years, but the Permanent Fund managers have a long-term investment strategy and no one can argue that over time they have not done a stupendous job of protecting and increasing our phenomenal asset.
  More details about the Fund are available here .

As we contemplate how best to fill the current $2.8 billion hole in our budget, it is well understood that some part of the earnings of the Permanent Fund in a “percent of market value” (POMV - a sort of rolling average of the earnings), will be used to support government services and some part will be used for Permanent Fund Dividends.  The Permanent Fund Corporation, which manages the investments, and has achieved a healthy return over the 40-year life of the fund, suggests that about 3% should be used for inflation-proofing the fund, and a bit of cushion, and 5% can be safely rolled off for dividends and government spending.  Others provide different percentages.

The argument is about:
  1. How much to take out of the earnings each year, 
  2. How to split it between state use and dividend checks, 
  3. Whether and how much to have people contribute directly in the form of broad-based taxes (sales or income tax).   Some say we should contribute nothing from taxes, relying only on the permanent fund earnings, cuts, and spending caps.  Others say a more equitable plan would be some combination of using the permanent fund earnings, cuts, and broad-based taxes. 
The current proposal in Senate Bill 26 would:
  • Remove the requirement that the Permanent Fund Corporation SHALL transfer funds for a dividend.  New language says the legislature MAY appropriate funds for a dividend, opening the door to the possibility of a future legislature deciding not to appropriate anything at all for a dividend. 
  • Convert the Permanent Fund management to a POMV approach, holding the principal and the earnings together, and allowing some percentage of average permanent fund earnings to be used for state functioning and dividends. Details about POMV available here.
  • Cap state spending at $4.1 billion.  The budget is currently about $4.3 billion so this cap would mean approximately $200 million in further cuts, which translates to the loss of roughly 2,000 jobs directly, and with the multiplying factor, another 500 jobs after that.  Alaska already has the highest unemployment rate in the nation so this cut will lengthen and deepen the recession.
  • State use of 5.25% percent of market value (POMV) draw from the Earnings Reserve Account for the first 4 years, then a decrease of use to 5%.  Of that 5.25% draw, 25% would be for dividends and 75% for state spending.  The PFD would be capped at $1000 for the first 3 years, then be formula-driven and reduced over time. 
Personally, I am committed to ensuring that Alaskans, who are owners of our vast resources, keep as much of the dividend as possible.  Remember, the basis of the dividend is earnings from just 3.12% of the gross value of our resources!  The state has spent everything else!
  • The PFD is an economic engine, bolstering local businesses across the state, 
  • The PFD keeps approximately 15,000 to 25,000 Alaskans above the poverty line every year,
  • The PFD is actually just a tiny part remaining from our vast resource wealth,
  • The PFD is arguably a birthright of future Alaskans.

Using the earnings of the Permanent Fund and cutting dividends to pay for government without additional measures is a regressive approach to solving the fiscal gap. We also need to look at capturing revenues from the 21% of Alaska’s workforce that do not live here but still earn a living off out state’s resources. 

I'm Berta and I'm listening,

How do you feel about SB 26 utilizing the earnings of the permanent fund?
It's a good plan.
The bill needs adjustments.
Not a comprehensive fiscal plan. Needs to include a broad-based tax.
Don't touch my PFD!

CONTACT ME
907-269-0174
Sen.Berta.Gardner@akleg.gov

Governor's Office
Gov.Alaska.gov
LtGov.Alaska.gov