In 2018, state lawmakers took a historic vote, using Alaska’s Permanent Fund earnings, the annual revenue from $80 billion pool of investments originally seeded with oil money, to fund state government.
For decades, the fund’s earnings were spent mainly on dividend checks paid to Alaska residents. The amount of each year’s dividend was tied to the rate of return on the fund’s investments.
The 2018 vote aimed at modernizing use of fund to manage it more like an endowment. Lawmakers dropped the returns-based formula and switched to yearly spending tied to the fund’s total value. They set the limit at 5%, which lawmakers described as the maximum that could be sustainably used without reducing the fund’s spending power.
Now just three years later, lawmakers are closer than ever to blowing past that limit to fill short-term deficits and pay larger dividends. Such a step would, in turn, force future generations of Alaskans to pay higher taxes or enact steeper spending cuts to keep the state’s budget balanced.
In an 11-9 vote two weeks ago, state senators approved spending an extra $1.5 billion beyond the cap to help fund near-record Permanent Fund dividend checks of $2,300.
Meanwhile, GOP Gov. Mike Dunleavy has proposed more robust protections for the fund by putting the 5% limit in the Alaska Constitution — while simultaneously proposing $3 billion in overspending to fill deficits that would linger until lawmakers agree to fill them with taxes or budget cuts.
For the past eight years, following a crash in oil revenue, Alaska lawmakers have been filling multi-billion-dollar deficits with money from other savings accounts.
But those accounts are now effectively depleted, spent down from a combined $16 billion with just $1 billion left. That’s making the Permanent Fund’s earnings an increasingly attractive option to lawmakers who can spend them with a simple majority vote.
“It’s a lot easier to get a simple majority to rob the Permanent Fund than it is to get votes to do taxes,” said Sitka Republican Sen. Bert Stedman. “There’s no other savings left after this year.”
Neither proposal to overspend from the Permanent Fund is final.
The Senate’s proposed PFD must be approved by the House and signed by the governor before taking effect. And Dunleavy’s plan has drawn a tepid reaction from lawmakers, who must approve a constitutional amendment by a two-thirds majority to send it to the public for a vote.
Nonetheless, the twin proposals underscore rising pressure from lawmakers to violate their own spending cap — and the long-term consequences of doing so. Every $1 billion withdrawn from the Permanent Fund costs the state $50 million in future yearly revenue, forever, assuming lawmakers can ultimately agree on annually spending 5% of its overall value.
That means the Senate’s plan, with its $1.5 billion in overspending, would force Alaskans to pay $75 million in taxes each year to make up for the lost revenue — or to accept $75 million in cuts to state programs. Dunleavy’s plan, with $3 billion in extra spending, would force $150 million in budget cuts or future taxes.
And that’s above and beyond the cuts or taxes needed to fix the state’s lingering structural budget deficit, which the Legislature’s nonpartisan budget analysts estimate would take $1 billion under Dunleavy’s proposal.
Opponents of overspending the Permanent Fund argue it’s shortsighted, placing unfair demands on future Alaskans in order to pay generous dividend checks to the Alaskans of today.
Making up the $150 million in yearly revenues sacrificed by Dunleavy’s plan would require each of Alaska’s 730,000 residents to pay $200 in yearly taxes — or to give up that much of their dividends.
Alternatively, lawmakers could completely eliminate annual unrestricted general fund spending on the departments of natural resources ($65 million), fish and game ($50 million), and environmental conservation ($15 million), and it still wouldn’t close the gap.
“Pick your poison: It’s poisonous. It’s all bad, it all hurts you. It’s objectively stupid,” said Sitka Democratic Rep. Jonathan Kreiss-Tomkins, who called overspending “generationally selfish.”
“There’s no good argument for spending down your savings,” he added. “Just as outside of the rarest and most fleeting of circumstances in life, there’s no good argument for liquidating your retirement account at age 37.”
Backers of the Senate’s and governor’s plans offer a range of supporting arguments.
In an interview, Anchorage Republican Sen. Roger Holland said the unprecedented economic hit from the COVID-19 pandemic justifies the one-time, $1.5 billion in overspending on dividends. He also indicated he’d be unlikely to support such a step in the future.
Holland, a freshman senator who made larger PFDs part of his campaign platform, said he’s been hearing from Alaskans struggling to make payments on commercial properties where tenants have stopped paying rent.
“There are businesses that are shutting down that won’t be reopening. And if you were ever going to help the private sector and try to give a real boost to the Alaskan economy, now would be the time to do it,” he said.
Dunleavy’s administration argues lawmakers need the $3 billion in overspending to give them time to settle long-running disputes over the size of the dividend, before they can move on to negotiations about taxes or future spending cuts.
The governor’s proposal aims to end the dividend debate by putting it in the Constitution: Half of the Permanent Fund’s annual spending would be dedicated to PFDs, leaving the rest for government spending.
Without that certainty around dividend rates, Dunleavy’s administration argues, it’s too soon to adopt taxes or spending cuts because lawmakers won’t know exactly how much money they need to cover government services.
In the mean time, though, Dunleavy’s administration projects the state will face a total of $2.8 billion in deficits over the next three fiscal years, which would be filled with overspending from the Permanent Fund.
“We need a framework to develop the taxes upon. If we don’t have a framework, and we have a constantly changing target in regard to dividends, we don’t really know where to set the tax at,” Revenue Commissioner Lucinda Mahoney said in an interview last week. “We don’t want to overtax our citizens; we don’t want to undertax. We want to do it right.”
Dunleavy’s administration has, so far, largely distanced itself from taxes. Its current proposal includes no specific plans for them, nor firm commitments that the governor will support them to fill deficits that remain after his plan is adopted.
Kreiss-Tomkins, the Sitka Democratic representative, argued that approach is backwards. Setting the amount of the dividend in the Constitution is the “easy part,” while taxes is the “hard part,” he added.
“That does not mean taking a chunk of money out of the Permanent Fund and saying, ‘Oh, we’ll figure it out later,’” Kreiss-Tomkins said.
Kreiss-Tomkins said he would, however, vote in favor of overspending the fund a single time — if it settled Alaska’s long-term budget questions once and for all.
“I would support a one-time, over-appropriation, were it a part of a grand compromise that protected the rest of the Permanent Fund forever, settled the dividend question and got us to a sustainable, balanced budget,” he said. “That would be a fully reasonable and appropriate thing.”