After weeks and months of talking about fiscal responsibility, balanced budgeting and the necessity for smaller PFDs, the Senate Finance Committee sent off an operating budget on Friday with a $3,000 Permanent Fund dividend requiring an additional $1 billion out of savings.
It was a surprise move, but with a full vote of the Senate and a conference committee with the House still ahead it’s also far from final. The question moving ahead is just how serious the Senate is when it comes to committing an additional $1 billion of state savings to pay for the dividend.
The move also comes alongside a vote to move $12 billion from the spendable earnings reserve account, which was about $18.8 billion at the end of the last fiscal year, to the untouchable constitutionally protected $46 billion corpus of the Permanent Fund. It’d leave around $3 billion in the account after this year’s budgeting.
Sens. Bert Stedman and Natasha von Imhof, the Republican co-chairs of the Senate Finance Committee, described it as an effort to protect the savings but also as essentially a way to force the conversation on a PFD and a spending limit.
“This amendment moves $12 billion into the Permanent Fund’s corpus, protecting those funds for future generations,” said von Imhof in a prepared statement. “It imposes a spending cap on state government and forces the conversation on a sustainable dividend calculation.”
The earnings reserve account was historically used as the source of PFDs and inflation-proofing for the constitutionally protected corpus of the Alaska Permanent Fund. But with the state’s traditional savings accounts nearly depleted, the earnings reserve account has become a critical source of state funding through the market draw approved by the Legislature last year.
Under the market draw approach, a set percentage of the total market value of the Permanent Fund is made available to spend in some split between government and dividends every year. The problem is that because the remaining earnings reserve account can be tapped with a majority vote, there’s been concerns that legislators won’t be able to help themselves against supplemental draws.
The fears aren’t unfounded because that’s precisely how the Senate is proposing to fund the $3,000 dividend.
The Senate has also been open that much of this exercise is positioning for the conference committee with the House on the operating budget: Set a maximum number and leave plenty of room for negotiations. But what the $12 billion sweep of the earnings reserve would do, if approved, is leave nearly zero room for error with the state’s market draws from the permanent fund in future years.
A year of bad returns could leave the account depleted, unable to satisfy even the allowable market draws. In the past, that’s required the Alaska Permanent Fund Corporation to sell off its assets, at a loss, to meet the need to pay PFDs.
Senators discussed this at Friday’s meeting, which prompted the $12 billion figure instead of the originally proposed $14 billion figure.
So instead of one bad year, it’d potentially take several bad years—or one really bad year—to put the state’s finances into a much more dire situation.
Ultimately, we don’t really know what the outlook will be. In the past, the Legislature has taken a measured approach to these types of changes with modeling to examine the risk of depleting the earnings reserve account.
In light of that, it’s likely that a much simpler calculus is driving these decisions. Politics.
Despite the recent talk about fiscal responsibility and smaller dividends, the Senate—and the Senate Finance Committee in particular—still has quite a few ardent supporters of a full PFD across the political spectrum. With the clock ticking on session, it may not be a matter of passing the best policy but pushing what has the best chance to pass.
The bill was moved out of the Senate Finance Committee on Friday and its next destination is the Senate floor.
The talk up to now has been about a driving desire to do something to settle the dividend debate this year—whether it be a statutory reduction, a step-down approach, new revenues or a constitutional amendment—acknowledging that it’ll be near-impossible to rework the PFD in an election year.
The reality is that politics appear to be very much a part of this year’s debate, too.