Legislators were never likely to approve any of Gov. Mike Dunleavy’s proposals to payback past years’ dividends. And that was before coronavirus-induced market panic erased the year’s gains in the Alaska Permanent Fund, sent oil prices plummeting amid a new price war and threatens to put the state’s tourism industry on ice.
Still, Dunleavy administration made the case for the repayment of the 2019 dividend to the House Finance Committee on Monday, presenting a new argument that breaking the Legislature’s spending rules for the fund doesn’t present as much risk as once thought.
The Legislature approved spending limits that would allow the state to spend 5.25 percent of the market value of the Alaska Permanent Fund on some mix of state government and dividends every year. That number will ratchet down automatically to 5 percent next year. The idea is that, on average, the fund will continue to grow faster than those draws.
While legislators have been worried about spending past that limit, Deputy Revenue Commissioner Mike Barnhill argued that spending beyond it can make sense as long as the fund’s returns can support it.
“What fundamentally I’m doing here is presenting a new lens, if you will, for watching spending from the permanent fund,” he said. “It’s measuring the funds spent and comparing that to the real return earned. I think this is a discipline we’re going to need to engage in every year.”
Barnhill noted that there have been times in the past when the spend for the dividend outpaced the returns, and the fund continued to grow.
”It’s not the end of the world,” he said.
The legislation proposes to spend about $816 million on supplemental PFDs to replace the portion cut by legislators in last year’s budget. It would come from the permanent fund’s earnings reserve account, bringing the effective annual draw on the account from 5.25 percent to 6.64 percent.
Legislators were not receptive to the newfound argument.
The major concern in front of legislators is the long-term health of the fund, concerned that any supplemental spending could increase the chance several poor market years—which is increasingly possible if the coronavirus panic is prolonged—could deplete the earnings reserve portion of the fund. Dunleavy, however, has eyed the fund’s billions for full-sized PFDs and PFD repayment.
“I’m confused by the administration’s position,” said Rep. Andy Josephson, D-Anchorage, noting that there were already concerns that the spending limits were too high before the coronavirus panic. “Part of what I hear you saying is the 5.25 percent may be too large, according to the corporation, but let’s spend more. That’s what I hear you saying.”
House Finance Committee co-chair Rep. Jennifer Johnston, R-Anchorage, said such spending would be a “one or two steps back” on the state’s efforts to enact a more stable fiscal policy in the wake of collapsing oil revenue.
House Finance Committee co-chair Rep. Neal Foster, D-Nome, summed up the current state of Alaska’s finances with ranging from the market impact on the permanent fund’s value to the downturn in oil prices.
“It’s not a pretty picture so I would have a lot of concern over paying a back PFD as well as paying a full PFD at this point,” he said.
The committee also heard from Alaska Permanent Fund Corporation CEO Angela Rodell, who reiterated calls for calm during the market downturn, noting that the fund is invested for the long-term and it has seen significant gains this year. She said that if the permanent fund closed its books for the year today, it would end the year without any gains or losses.
As far as additional spending, she told the committee that one of the most important things for the health of the permanent fund is clear and dependable expectations set by the Legislature.
“We can only control what we can control, we can’t control what the market is doing, and we can’t control what you appropriate out of the earnings reserve account,” she said. “So, what we are encouraging you to do is to stick with what we’ve agreed to as a spending rule on the permanent fund and we will invest it to the best of our ability and we will manage the liquidity to the best of our ability because that’s what we do.”