The House Finance Committee advanced legislation on Monday that would transfer $8 billion from the spendable earnings reserve account of the Alaska Permanent Fund to the constitutionally protected corpus of the fund.
Moving money from the earnings reserve account, which can be spent with a majority, out of the Legislature’s reach has gained traction late in the session amid growing concerns legislators may already break the spending limits they put in place last session.
The Senate has proposed a $12 billion transfer in its version of the operating budget, but House Bill 31 sponsor Rep. Jonathan Kreiss-Tomkins, D-Sitka, said he’s concerned it would put the state’s finances on the brink if there are several years of “moderate bear markets.” He’s also arguing that the whole discussion underlines the need for a rethinking of how the Alaska Permanent Fund is treated in order to protect it against unsustainable spending.
The committee opened the debate on Monday by considering a $9.61 billion transfer before ultimately lowering it to $8 billion.
That amount would leave about three times the amount needed to satisfy the percent of market value draw that legislators approved last year, which makes 5.25 percent of the total value of the permanent fund available for some split between government and dividends. Those are the rules Kreiss-Tomkins and many other legislators are worried could already be ignored.
“The thinking is it protects a substantial amount of cash forever in the permanent fund, which I think is broadly a goal of the Legislature, while striking a balance and leaving significant shock absorption in the earnings reserve account,” he said.
While larger transfers may be popular, Kreiss-Tomkins has pointed out that under several years of poor market returns, it could deplete the earnings reserve account altogether. Under those conditions, the state would not only have trouble paying for state operations but also a dividend.
The committee decided for a slightly reduced transfer after hearing from Legislative Finance Division Director David Teal, who warned that the Alaska Permanent Fund is more complicated than its two accounts would suggest. He also noted that the Alaska Permanent Fund has a significant amount of its value wrapped up in what are called unrealized earnings spread across both the earnings reserve account and the principal. These are growth in the permanent fund’s investments that have yet to be turned into cash.
He said about $2.4 billion of the $18.4 billion earnings reserve account are considered unrealized earnings.
“There’s no money there,” he said. “The more proper starting point is about $15.5 billion.”
Rep. Jennifer Johnston, R-Anchorage, noted that it’s not impossible to tap into unrealized earnings.
“In a desperate or spend thrifty market, we could divest ourselves of it,” she said. “It wouldn’t be pretty, but we could.”
Teal agreed, but said that decision is ultimately up to the Alaska Permanent Fund Corporation. Johnston noted she wasn’t advocating for such a policy but said it’s important to keep it in mind.
“What I’m saying is that 2008 would have been a perfect example when we were under and did not have the funds to pay a dividend,” she said. “But as true Alaskans we always get a second chance.”
She said it serves as an example of why giving the Alaska Permanent Fund Corporation clear guidelines and expectations of the cash it needs to have available is necessary.
To that end, the committee ultimately settled on an $8 billion transfer, which was approved and advanced from the committee.
Further changes needed?
Minority Republicans were skeptical of the transfer, arguing that it might be premature when the Legislature hasn’t yet approved a long-term fiscal plan. Gov. Michael J. Dunleavy and minority Republicans have argued in favor of a constitutional spending limit, deep cuts and what would effectively be a constitutional prohibition on new taxes—none of which have found much traction in the Legislature.
Kreiss-Tomkins argued that the transfer serves as its own fiscal plan of sorts by taking money out of the hands of the Legislature but said that it ultimately underlines the need to rework the permanent fund. Kreiss-Tomkins has proposed a constitutional amendment that would combine the earnings reserve account with the principal of the fund and make only the amount needed for the percent of market value draw available to be spent on government or dividends.
“This is truly the heart of the question, what is the right balance? So long as we have a permanent fund that’s structured with both an earnings reserve account and a principal, I think that’s an unnecessarily complex structure and having a true endowment is much safer for the state of Alaska and much more sustainable,” he said. “The reason this is even a problem is the reason we should move away from this structure of the permanent fund. So long as we do have the earnings reserve account, there’s always the risk it will bottom out and unless we’re committed to protect against the fund bottoming out in any scenario.”
He said as long as the earnings reserve account is in play, the Legislature will need to make sure there’s enough money in it to weather bad markets but said that keeping money in it will always tempt legislators.
“If that’s going to be guiding North Star principal, we should always leave as much cash in the earnings reserve account as possible,” he said. “Obviously there’s a downside to that too, which is the risk that the fund gets raided beyond sustainable means in some future year wherever the political winds of the time are blowing.”
Interest in the Senate
The talk of spending beyond the guidelines set out by the Legislature are already on the table this year. The Senate, at this point, is on track to ignore that limit after it passed a budget that rejected many of Dunleavy’s cuts and proposes paying out a $3,000 dividend. It would require roughly an additional $1 billion out of the earnings reserve account.
It’s unclear where the Legislature will ultimately land with the dividend, but there is interest in the Senate for a permanent fund transfer more in line with the proposal advanced by the House Finance Committee.
When the operating budget passed through the Senate floor, Soldotna Republican Sen. Peter Micciche offered an amendment that would have lowered the Senate’s transfer to $9 billion. He also raised the same concern of removing the state’s last major remaining shock absorber in the budget.
Micciche ultimately withdrew the amendment, noting the number would be one of many up for negotiation in the conference committee with the House and the Senate leadership was aware of the problems posed by a big transfer.