With concerns that legislators won’t be able to resist tapping into the spendable portion of the Alaska Permanent Fund known as the earnings reserve account, legislators are considering a late-session push to put billions of dollars forever out of reach of the Legislature.
The Senate opened the latest round of the conversation last Friday by proposing to move $12 billion of the $18.8-billion account into the constitutionally protected principle of the account. That money can’t be spent without a public vote to alter the constitution, a far higher bar than the majority of legislators needed to tap into the earnings reserve account.
But the transfer potentially carries its own risks, and the House Finance Committee on Monday heard a more moderate proposal in response to the Senate’s pitch.
House Bill 31 by Rep. Jonathan Kreiss-Tomkins, D-Sitka, proposes transferring $5.5 billion from the earnings reserve account to the principle of the fund. Kreiss-Tomkins proposed such a transfer via an amendment to the operating budget last year. He told the committee since introducing the bill at the start of session, he would suggest increasing the amount to $8 billion.
Kreiss-Tomkins argued that larger transfers carry higher risks of depleting the account under bad market years.
“The earnings reserve account can fluctuate on market conditions, and if you have a bear market, if you have poor returns, the earnings reserve account gets small and it can get small pretty quickly,” he said.
In the past, the Alaska Permanent Fund Corporation has had to step in by selling off its assets at a loss to cover the dividend. A bigger earnings reserve account can serve as a “shock absorber” for bad years, he said.
His presentation also included modelling of what the account would look like with three consecutive years of a “moderate bear market” where the account sees annual returns of 3 percent. It included ideas of what would happen to the account under the the $5.5 billion, $8 billion and $12 billion transfers, underlining the risk of larger transfers.
“When you look at a stock market that maybe isn’t doing as well as it is right now, which I think you need to consider, you’re starting to play with fire the more money you transfer,” he said. “You need to retain some liquidity in the earnings reserve account as a shock absorber for bad market years.”
The fund has seen recent returns of 10.7% in 2018, 12.5% in 2017 and 1.02% in 2016.
It’s also seen as low as a -17.96% return in 2009 economic downturn.
Rep. Dan Ortiz, I-Ketchikan, also noted that the modelling only considered the downturn beginning after the upcoming fiscal year. If the hypothetical downturn started later this year or was worse than the modelling, he wondered what the charts would look like.
“Yes, if the bear market were four years instead of three years, if it’s 1 percent instead of 3 percent, all of these charts look worse, and that’s this playing with fire game that we have,” he said.
Editor’s note: The preceding quote has been updated to correct a typo in the initial version of this story. He said 1 percent, not 4 percent.
The committee wasn’t pushing to move the legislation so there was little discussion on the legislation’s overall merits, but Rep. Ben Carpenter, a minority Republican from Nikiski, wondered why not put the money into the constitutional budget reserve under its payback provisions. The constitutional budget reserve requires a three-quarter vote of each chamber to access.
Rep. Tammie Wilson, R-North Pole, said it’s a decision about the degree of protection they want for the money.
“So the question here is basically twofold: If you want to protect the earnings reserve, which only takes a vote of 21 and 11 (in the House and Senate to spend), from being able to be utilized for fill in the blank, you can put it into the constitutional budget reserve or the corpus of the permanent fund. The second question is: How much do you want to protect it?” she said. “If you truly want to protect it from filling in the hole, then you put it in the corpus.”
Legislative Finance Division Director David Teal also later addressed Carpenter’s call to refill the constitutional budget reserve, noting that the payback mechanism in law doesn’t apply to the permanent fund’s money but to any general fund surpluses at the end of the year.
Kreiss-Tomkins also acknowledged that a larger transfer to the permanent fund’s corpus isn’t inherently a bad idea, but that it would need to be done as a larger reworking of the permanent fund.
To that end, he’s the lead sponsor of proposed a constitutional amendment that would merge the earnings reserve account into the principle of the fund while enshrining the percent of market value rules into the constitution. Under that plan, legislators would be forced to follow the allowance they’ve set and there wouldn’t be the same risk of depleting the account.
“What seems to happen is when we struggle to agree on just how to balance the budget or how to solve the fiscal plan—the inability to find a grand compromise—we sort of kick the can down the road. When we kick the can down the road we find some cash that’s spendable to keep us going for one additional year,” he said. “My goal is that, and I think a goal shared by a lot of people in this body, is that we have enough money protected permanently in the permanent fund that we can continue to argue about how to spend that money 20 years from now.”
Kreiss-Tomkins’ proposed constitutional amendment HJR 18 is up for a public hearing in the House State Affairs Committee at 3 p.m. today.