Contentious debate to continue, no matter what Legislature decides to do with Permanent Fund

The Legislature is edging closer to adopting a percent-of-market-value, or POMV, plan for using Permanent Fund earnings to help the state budget, but no matter what happens a contentious debate is likely to continue through the summer and fall election campaigns.

Jim Crawford, a former banker and Republican Party activist, offered up a taste of what’s coming in a meeting last Friday, May 4, with Commonwealth North members in Anchorage. Commonwealth North is business-oriented public policy group based in Anchorage.

Crawford criticized the POMV, now in Senate Bill 26 that is pending in the Legislature, and said he is aligned with “Defenders of the Permanent Fund,” a group that includes two former Senate Presidents, Rick Halford and Clem Tillion.

One of the biggest defects of the current plan, a compromise version of the plan that emerged last week in Juneau, is that it would essentially have the Legislature decide each year the amount of the dividend and how much of the Permanent Fund earnings draw would be used for the state budget.

That injects instability into the amount allocated for each use and guarantees a drawn-out yearly debate over the allocation. Also, the dividend allocation is more likely to suffer against public service budgets in the annual competition for funds.

Earlier versions of SB 26 had an explicit allocation between the budget and PDF – 75 percent to 25 percent (for the PFD) approved by the Senate and 70 percent to 30 percent (PFD) in a House-approved version.

That was dropped in the pending compromise, leaving it open to year-to-year decisions by lawmakers.

A fundamental defect in the current POMV plan is that this departs from the fundamental premise of former Gov. Jay Hammond and other state leaders when the Permanent Fund and PFDs were set up in the late 1970s and early 1980s; that the amount of the annual dividend must be linked to financial performance of the Permanent Fund.

This is what keeps citizens engaged, and vigilant in safeguarding the Fund. The latest plan, in contrast, has the PFD amount part of the Legislature’s annual budget negotiation.

Crawford feels, however, that a POMV might not really be necessary and that the existing statute that guides the allocation of earnings to the PFD can work just fine, and also leave enough to help support government.

Currently the earnings calculation is based on realized earnings, or the actual cash income to the Fund including proceeds from sales of stock or other assets, interest on bonds, rentals on property or other income. Unrealized gains or losses in market value are not included.

Although the statute allows a split realized earnings to the PFD, calculated as an average of several prior years’ realized income, the Legislature and governor don’t have to appropriate the full amount and have not done so for two years, Crawford said.

This will happen again in 2018, with a proposed appropriation for a $1,600 dividend compared with a full appropriation, under the statute, of a dividend that would be about $2,700.

If the statute were followed, a full 2018 dividend could be paid and there would still be a substantial amount of Fund earnings left to support the upcoming Fiscal 2019 budget, Crawford said. Crawford had no estimate of how much a 50-50 split of realized earnings would make available for the budget in his Commonwealth North presentation, but he said it is likely to be similar to the amount available for the budget the current POMV plan in SB 26, which Is about $1.8 billion.

A key point Crawford made to Commonwealth North is that leaving the current allocation in place provides a guideline for the PFD, which is better than having a year-to-year debate.

Another key point was that the Permanent Fund is a more potent source of income than most Alaskans realize.

“Your Permanent Fund earned $6.7 billion in Fiscal Year 2017 and paid out $653 million,” in dividends, which were reduced,” Crawford said. “This year’s earnings, year-to-date, are $5.377 billion. Somebody is cooking the books,” he added, claiming that there isn’t enough money for both PFDs and the budget.

Crawford said he also went through the state’s Comprehensive Annual Financial Report, or CAFR, a federally-required document. “I read all of it – 342 pages. As a former banker, it was interesting,” he said.

“I finally found what I was looking for in the FY 2017 CAFR, under the heading, ‘Financial highlights – Government Wide.’ It was this: ‘The state’s total net position increased by $3.9 billion as a result of this year’s operations…” Crawford said.

“Let me translate that: All funds accounted, the state of Alaska had a net profit of $3.9 billion for FY 2017. There was no deficit unless you count only the expenses of the (state) General Fund and exclude all the earnings of the Permanent Fund,” he said.

The earnings have meanwhile been accumulating in the Fund’s earnings reserve account, which has not been spent except for dividends and inflation-proofing, or injecting earnings back into the principle of the Fund to adjust for inflation. The inflation-proofing has meanwhile not been made for three years.

The Earnings Reserve now has about $17 billion, Crawford said.

All this is counter to Jay Hammond’s basic strategy for the Permanent Fund. “Hammond created his fiscal plan to replace nonrenewable (oil) income with renewable income (investments). He told us oil earnings would go up and when the fields went dry, would come down,” Crawford said.

Crawford was an investment advisor to Hammond at the time.

“Our job was to figure out how to maximize earnings of the Fund so that when the earnings lines crossed we could incrementally use a portion of the combined earnings (oil and investment) for government expense while still protecting the Fund,” he said.

“That way we need not force a recession, destroy the government we’ve built or destroy our private sector,” because the state budget will have been stabilized. “The ‘Peoples’ Dividend’ was to be the guardian. The dividend recipients are today’s Permanent Fund defenders,” Crawford said.