Court ruling could have doubled this year’s PFD… if Dunleavy hadn’t already vetoed it

Buckle up because this is going to be more complicated and wonkier than usual.

The dividend that finally emerged from the Legislature’s budget fight this summer sat at $525, lower than in recent years as legislators struggled to scrape together the funding and votes to keep the state open. But thanks to a combination of some deeply wonky end-of-session maneuvering and the recent ruling on the Power Cost Equalization lawsuit, it could have automatically grown to as much as $1,025.

But as of right now, it’s $0 and won’t be growing without new action by the Legislature and governor.

That’s because Gov. Mike Dunleavy vetoed the dividend approved by the Legislature, arguing that legislators should dip into savings for a payout nearly five times the size. He’s currently pushing for a $2,350 PFD that would require a roughly $1.57 billion draw on the Alaska Permanent Fund, a figure that few see as politically likely despite recent work on a long-term fiscal plan.

To understand how this all happened, we need to rewind the clock to June during the last-minute maneuvering by the Legislature’s lead budget negotiators to force a vote on the Constitutional Budget Reserve, a bar that requires three-quarters of each chamber. With far-right legislators keen on using the vote as leverage to get a larger PFD along with a slate of increasingly unrealistic requests, the budgeters put together a plan tying funding for half of a $1,100 PFD to the Constitutional Budget Reserve vote as well as more than $76 million of capital projects in the Mat-Su area.

The mechanics of this used the Statutory Budget Reserve, a general-use account that has been used like the state’s general fund and has been subject to the sweep every year, as the parking lot for these funds. The whole plan assumed that the Statutory Budget Reserve would be automatically moved into the Constitutional Budget Reserve under the payback provisions known as the sweep, requiring the supermajority vote to reverse it.

Essentially the deal was: Help us with reversing the sweep and you’ll get half of the PFD as well as the funding for a bunch of capital projects in your district routed through the Statutory Budget Reserve. Don’t help us and those funds will be automatically swept up.

This is where the ruling in the Power Cost Equalization lawsuit then comes in. While the ruling was strictly about the Power Cost Equalization fund not being subject to the annual sweep, it did note that the Statutory Budget Reserve would likely be exempt from the sweep. This was a big surprise to most, including those who put the plan together banking on the roughly $320 million in the fund to be swept if the vote failed.

It’s not yet entirely clear whether the administration, which conducts the sweep, will change its plans for the Statutory Budget Reserve based on the ruling, but the Legislature’s legal team argues the order is clear it should be spared.

What that means is that all the money that was Statutory Budget Reserve money that was supposed to be tied up the reverse sweep is likely there and available to be spent according to the budget. That means that the funding for the capital projects will likely be revived as well as funding for some school bond debt reimbursement but that won’t be the case for the dividend, which Dunleavy vetoed altogether.

Legislative Finance Division Director Alexei Painter explained the whole situation during today’s meeting of the Senate Finance Committee. He noted, though, that the fate of the statutory budget reserve is still technically in the hands of the governor and his administration. While the ruling in the lawsuit certainly suggests the statutory budget reserve isn’t subject to the sweep, it doesn’t explicitly order it to be exempt from the sweep.

“So, depending on the SBR status, the dividend amount that reflected was different. If the SBR was swept and unavailable, then that veto would have been of a dividend of $525. If the SBR is not subject to the sweep, then the PFD would have been $1,025 because that $320 million would have been able to go out as well,” he said.

Senate Finance Committee co-chair Sen. Bert Stedman, one of the architects of the plan using the SBR and a frequent critic of the Dunleavy administration and his legislative allies, rephrased the situation:

“If he did not veto the $525 dividend to zero and the SBR is not swept, which is highly likely that’s the case, then the dividend would be coming out this fall at $1,025 dollars,” he said, “is that correct?”

Painter said it is.

“He actually took it from $1,025 to zero,” Stedman elaborated.

“That’s correct,” Painter replied, but added that there was no way to predict the ruling. “When the governor did his vetoes there was no way to know the SBR status might change but, yes, that’s correct and a fact.”

The exchange

Bigger, even wonkier concerns

The escalation of the fight over the Constitutional Budget Reserve sweep as leverage is forcing the Legislature to rethink how it handles its finances, an issue that was brought up at Monday’s meeting at several points. Sen. Lyman Hoffman, D-Bethel, said they should pass language that clearly exempts the state’s Higher Education Investment Fund, which pays for scholarships and the state’s participation in the WWAMI medical school exchange program, from the sweep.

But it was the investment changes that seemed to draw the most ire at the hearing. Where some of the funds like the Higher Education Investment Fund are set up to be aggressively invested in riskier, high-return investments, the Constitutional Budget Reserve is far more conservatively positioned meaning the money in it earns far less. Painter said the difference is substantial, potentially in the tens of millions of dollars.

In a rare move, Stedman turned his ire on legislators who opposed the sweep and accused them of being uneducated about how the state’s financial system works.

“Some elected officials think they’re to saving money doing these type of maneuvers and they’re costing the state tens of millions of dollars to educate them on basic state finances,” he said. “It’s unfortunate that we have to go through these exercises the tens of millions to educate some of these elected officials. This is one of the most ridiculous things I’ve seen in years that accomplishes very little.”