The Alaska Legislature is moving quickly to address a bill that would divert a portion of the Alaska Permanent Fund to pay for the state’s annual expenses, but judging by the emails and calls reaching legislative offices this week, Alaskans still have a lot of questions.
Here’s some answers to some of the most common questions we’ve heard in the Bill Ray Center this week about Senate Bill 128:
Why do we need this bill?
“There’s been a structural shift in the price of oil going forward,” Revenue Commissioner Randall Hoffbeck told lawmakers on Monday.
In 2014, oil funded 90 percent of the state’s budget. Since then, oil prices have plunged, leaving a huge deficit. In fiscal year 2017, which starts July 1, lawmakers say the deficit is $3.2 billion. The governor says the Legislature is using one-time money reserved for a liquefied natural gas pipeline to conceal the deficit’s size, and it’s actually $3.8 billion.
That deficit is currently being funded with state savings accounts.
At current values of the Alaska Permanent Fund, SB 128 would replace about $1.92 billion in savings with Permanent Fund earnings. It’s the largest single piece of Gov. Bill Walker’s 13-point plan to fix the deficit.
Fixing the deficit is important, Walker has said, because companies are reluctant to invest in Alaska unless they know their taxes won’t abruptly rise in the near future. If the deficit is only 80 percent fixed, people are going to worry that they’re going to be part of the solution to the other 20 percent.
In addition, government employment makes up a huge part of Alaska’s economy. According to figures from the Alaska Department of Labor and Workforce Development, in 2015, state government jobs were 7.6 percent of Alaska’s workforce. Local government employs another 12.2 percent.
“Using our savings is the one solution that we have that doesn’t shock our economy,” Hoffbeck said.
What harm does the bill cause?
A study released earlier this year from the Institute for Social and Economic Research at the University of Alaska Anchorage found that cutting the Permanent Fund Dividend is effectively a regressive tax.
Because every Alaskan receives the same amount, it makes up a bigger part of poor Alaskans’ incomes.
Also, most Alaskans spend their entire Dividend every year, and taking it away would impact the state economy.
At a statewide level, “We’re talking about this year, $700 million that would not go into Alaska’s economy,” said Rep. Mark Neuman, R-Big Lake and co-chairman of the House Finance Committee.
According to the ISER report, quoted Tuesday by Rep. Les Gara, D-Anchorage, that kind of impact would cost 8,000 jobs.
Neuman added that he worries that if the deficit shrinks too much, it will reduce the pressure on future legislators to cut the budget.
What happens if the bill doesn’t pass?
Nothing immediately, but things get bad within a few years. Unless oil prices rebound or the Legislature passes big taxes, lawmakers will have to use the last bits of the Constitutional Budget Reserve to make ends meet in fiscal year 2018, which starts on July 1 next year.
The year after that, they’ll have to use the Permanent Fund’s earnings reserve to make ends meet. That’s the same fund that pays the Dividend.
There’s enough money in the earnings reserve to pay for the dividend and for government operations for two to four years (Hoffbeck is more pessimistic, Legislative Finance Director David Teal more optimistic), but the end result is the same: An end to the Dividend, and effective state bankruptcy.
Alaska would be forced to enact massive tax hikes or draconian cuts to critical state services by the summer of 2022 at the latest.
Those would cause massive state and local government job losses, and the resulting uncertainty would plunge Alaska into a recession similar or worse than the one that hit the state in the mid-1980s.
We need to cut the budget first. Where are the cuts?
Since spring 2014, the Alaska Legislature has cut the state budget approximately 30 percent — from $12.54 billion to $8.83 billion. Those figures include federal dollars and money from dedicated state funds, however.
If you include only the state’s “unrestricted general fund” spending, paid for with most taxes, the Legislature cut the budget from $5.42 billion in fiscal year 2015 to $4.26 billion in fiscal year 2017 — a decline of more than 21 percent — and that’s before Walker exercises his veto pen.
Much of what remains in the budget consists of things that are difficult or illegal to cut. Under Obamacare, for example, the state has health care obligations. Under the Alaska Constitution, the state has obligations to provide K-12 education and a university system.
“It’s not like we’re trying to grow government. We’re trying to hold on to our fingernails to the services we’re already delivering,” Hoffbeck said.
Isn’t this a raid on the Permanent Fund?
Not unless you have a particularly creative definition of “raid.” The Permanent Fund as a whole has a value of $54 billion, according to its April financial statement. This money is collected in two principal sections: the corpus, and the earnings reserve.
The corpus has a value of about $44 billion. It is protected by the Alaska Constitution and cannot be spent without a vote of the people.
The earnings reserve contains proceeds from the investment of the corpus. It has about $7.7 billion, according to the financial statement. That figure does not include about $1.4 billion that has already been set aside to pay this year’s Dividend. Since SB 128 could be changed before it passes, we don’t yet know how that $1.4 billion could change.
SB 128 would draw 5.25 percent of the average value of the Permanent Fund in five of the last six years. That “five of six” is designed to protect the fund from big up years or big down years.
If oil prices unexpectedly spike above $75 per barrel, that draw wouldn’t happen or would happen in a smaller way. The money would stay in the earnings reserve.
What happens to my Permanent Fund Dividend?
Without SB 128, you’re on course to receive about $2,000 this fall. With SB 128, you’ll receive $1,000 instead.
You’re also guaranteed a $1,000 dividend in 2017 and 2018. After that, the dividend will come from a portion of the annual draw. Alaskans will share 20 percent of that 5.25 percent draw and 20 percent of the royalties paid by oil companies.
The dividend under that calculation would be about $900, with three-quarters coming from the Permanent Fund and one-quarter from the royalty.
What happens if the stock market crashes?
Speaking to the House Finance Committee on Tuesday, Permanent Fund Corporation director Angela Rodell referred to the Great Recession when she said, “Obviously, 2008 is something we would prefer to never revisit at all. We believe we’ve built a portfolio that is designed to withstand some of that risk.”
By drawing an average from five of the last six years of the Permanent Fund, the SB 128 system tries to avoid the effects of a one-year crash. If the crash lasted longer than that, the draw would fall with the size of the Permanent Fund. The state would have less money to spend.
Rodell said if the bill passes, she expects the Alaska Legislature to keep a much closer eye on the performance of the Permanent Fund when so much is riding on the success of its investments.
Whose idea is this?
In December, Gov. Bill Walker proposed a 13-point plan to fix the state’s deficit. The cornerstone of that plan was a proposal to invest all of the state’s savings accounts, then live off the earnings. It would have turned the Permanent Fund into a money factory generating about $3.3 billion per year.
Lawmakers poked holes in that idea and turned to a proposal from Sen. Lesil McGuire, R-Anchorage. Starting in 2015, she began working on SB 128 as an alternative to Walker’s approach.
When lawmakers turned away from Walker’s idea, they turned to McGuire’s. The governor has since taken over the driving of the bill, which is why Alaskans haven’t seen McGuire testifying in support of the bill in the House.