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By James Brooks
Alaska Beacon 

Candidates for governor differ on how to pay the Permanent Fund dividend

 

October 19, 2022



Since 2016, no issue has divided Alaska state lawmakers more than the issue of the Permanent Fund dividend. The annual struggle over the amount given to state residents has repeatedly driven the Legislature into impasses that have brought the state to the brink of a government shutdown.

Ahead of this year’s governor election, independent candidate Bill Walker, Democratic candidate Les Gara and Republicans Mike Dunleavy and Charlie Pierce have each outlined different approaches to solving the impasse, which voters have said is a top issue of concern.

Before 2018, the main use of the Permanent Fund was to serve as an investment savings account and to pay dividends according to a formula that has been mostly unchanged since its inception in the 1980s.

In 2018, the Legislature and then-Gov. Bill Walker approved a system setting up an annual transfer from the Permanent Fund to the state treasury.

At the time, state oil revenue had collapsed, and spending a portion of Permanent Fund earnings was necessary to preserve public services. A large portion of the investment earnings can be spent with a simple majority vote of the Legislature.

For decades, fear of constituents’ backlash combined with longstanding precedent to block various attempts at spending from the fund. But in 2018, the situation appeared dire, and most lawmakers agreed it was necessary to spend from the fund on services.

At the same time, they believed that if they began spending, future legislators and governors would be encouraged to spend from the Permanent Fund without limit, and so they agreed to limit annual withdrawals to 5% of the fund’s five-year average value.

For the current budget, covering fiscal year 2023, that transfer is $3.36 billion.

But lawmakers in 2018 did not say how much of that transfer should be reserved for dividends and how much should be reserved for services.

As a result, every year since then, state lawmakers and the governor have argued over the proper split.

Kenai Peninsula Borough Mayor Charlie Pierce, running as a Republican in this year’s gubernatorial race, advocates paying dividends according to the formula from the 1980s.

If the traditional formula had been used in the current fiscal year, it would have cost $2.65 billion, more than two-thirds of the transfer from the Permanent Fund, and paid between $4,000 and $4,200 per recipient, with estimates varying based on a variety of factors, including the number of recipients.

The drawback is the same one that confronted lawmakers in 2018: Unless oil prices are high, using that 40-year formula creates a deficit at present levels of spending on education and other public services.

That means additional taxes or significant budget cuts are needed to balance the budget when using the traditional PFD formula.

In an Oct. 6 candidate forum in Homer, Pierce indicated that he would support budget cuts to balance the budget if a traditional dividend is paid. At the forum, Pierce did not outline specifics.

Budget experts have questioned whether cuts on the necessary scale are possible.

In 2018, Dunleavy ran for office with a pledge to use the traditional PFD formula. He proposed vast budget cuts in order to make that possible, but Alaskans reacted negatively, starting a recall campaign to remove him from office.

Dunleavy later reversed himself on many of the cuts, and in 2021, he proposed a new dividend formula called the 50-50 plan, splitting the annual draw on the Permanent with half to dividends and half to public services.

The 50-50 approach was used this year, with $1.68 billion set aside for a dividend of about $2,600 per recipient. State lawmakers added a special one-time energy relief payment on top of that, resulting in this year’s payment of about $3,200. High oil prices funded this year’s large payment, but prices have fallen about one-third since the budget was adopted.

As he runs for re-election, Dunleavy is continuing to boost the 50-50 plan on his campaign website and in candidate questionnaires.

Dunleavy has said he believes the 50-50 split should be enshrined as an amendment to the Alaska Constitution in order to avoid perennial arguments over the value of the dividend.

Thus far, the Alaska Legislature hasn’t approved Dunleavy’s plan for the constitution, in part because of fears that the 50-50 approach would create a deficit at low oil prices.

In numerous campaign appearances, Democratic gubernatorial candidate Les Gara has said that the state should revise its oil tax system in order to pay for both a large dividend and for services that Alaskans want.

“With oil tax reform, you can fund schools, you can fund the construction and community project budget, you can fund all the things we need in this state, and you can fund a dividend,” he said Oct. 10.

“I think the best way to protect the dividend is to have revenue. And the biggest enemy to the dividend is not having a fair share for oil so we don’t have the revenue, and then you put the dividend in competition with schools, in competition with troopers, in competition with prosecutors, in competition with a construction budget,” Gara said.

In 2016, then-Gov. Walker oversaw the beginnings of the Permanent Fund dividend struggle. Facing an oil price shock, he vetoed half of that year’s dividend, an act that kept billions in the fund to be re-invested but cratered his support among voters.

“I made some really tough decisions,” he said Oct. 5 in Juneau. “And I knew how unpopular they were going to be when I made them. Someone had to do it.”

“I did what I had to do to protect the Permanent Fund,” he said.

Walker’s veto effectively ended the traditional dividend formula. Every year before it, state lawmakers followed the formula, and every year since then, lawmakers have ignored it in favor of smaller payouts.

While he’s certain that he made the right call in 2016, he’s less certain about what will replace the old dividend system.

In interviews, he has said he isn’t wedded to a specific approach and will consider any approach that can pass the Legislature.

“My plan is whatever will get 21 and 11,” Walker said, referring to the number of votes needed to get a bill through the state House and Senate, respectively.

“I’m not wedded to saying ‘it’s got to be my solution,’ and I’m not going to pick one (option) and say, ‘OK, here’s my solution,’” Walker said.

 

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