Plan to put PFD into constitution sparks debate in Juneau

JUNEAU — The 2018 state legislative session is more than halfway through its scheduled 90 days, but few people in Juneau take the 90-day limit seriously anymore.

A big problem that has surfaced that could keep legislators in session until the constitutionally-mandated 120-day limit, however, is a proposal by the Democrat-led state House leadership to put the Permanent Fund dividend into the state Constitution as a guarantee.

HJR-23, proposed last year by House Majority Leader Chris Tuck, D-Anch., would put the dividend in the Constitution. The resolution is now in the House Finance Committee where a new, expanded version was introduced last week by committee co-chair Rep. Paul Seaton, R-Homer.

The sponsorship was also changed so that HJR 23 is now sponsored by the House Finance Committee instead with Tuck as prime sponsor, an effort to signal that the idea is endorsed by the full House Majority.

However, that support may be unraveling in the face of legal obstacles and possible disagreements within the majority over the new structure of HJR 12. Meanwhile, passage of the state operating budget, which is also in the House Finance Committee, is being held up until the constitutional amendment for the PFD is dealt with.

One hearing on HJR 23 was held last Monday but no further hearings were held – or are scheduled for the week of March 19 – a signal that the members of the finance committee are in disagreement over the proposal.

When the initiative was announced last Monday in committee it seemed like the proposal was on a fast track. That’s no longer the case, apparently.

As written now, the resolution would amend the Constitution with a provision that would allocate how Permanent Fund earnings are to be used. Currently the Constitution simply says the Legislature will appropriate the earnings of the Fund (the principal of the Fund cannot be appropriated, however).

HJR 23 provides that 4.75 percent of the market value of the Fund would be automatically transferred to the state General Fund. Technically, the draw comes from the Earnings Reserve account of the fund, which holds the income and can be appropriated. This is similar to the current practice of the Legislature appropriating for Permanent Fund Dividends from the earnings reserve.

However, HJR 23 further provides that the 4.75 percent draw would be split, with two thirds going to support the state budget and one third to the annual dividend.

The amendment would also provide that “inflation proofing” injections of earnings can made from the Earnings Reserve account back to the principal of the Fund with a majority vote of the Legislature. This is the current practice when inflation proofing payment are made.

Meanwhile, any other draw from the Earnings Reserve, to deal with a public emergency, for example, would require a three-quarters vote of the Legislature, as is now done with money taken from the Constitutional Budget Reserve, a state savings account.

If HJR 23 would be passed by the Legislature and approved by voters in a general election it would draw $2.46 billion from the Earnings Reserve in FY 2019 with $1.65 billion allocated for the General Fund and $813 million for dividends. This would pay a $1,258 dividend next year.

In 2025, under the proposal, $3.2 billion would be taken from the Earnings Reserve with $2.14 billion for the general fund and $1.056 billion for dividends, and providing a PFD that year of $1,576.

Seaton and others argue that this allocation is sustainable for the long term because the percentage draw of 4.75 percent is less than the 5 percent maximum draw that the Permanent Fund’s Board of Trustees say can be taken without jeopardizing the long-term viability of the Fund.

It’s not known what disagreements exist in the House Finance Committee. Some might involve differing percentages in the split, such as more money going to the dividend, or less. Others may object to the idea of putting something like the PFD into the Constitution instead of leaving it up to the Legislature, the current practice.

However, the Legislature’s attorneys have thrown a wrench into this. Last Monday Doug Gardner, the Legislature’s legal services director, voiced strong concerns over the original language of HJR 23 that the Legislature “shall” appropriate a PFD and of the amount stipulated in the split of the POMV draw.

Gardner said there is a high probability that the Alaska Supreme Court will strike down the amendment because of it would disrupt other requirements in the Constitution.

Basically, the Constitution places a number of general requirements on the Legislature, such as providing for a system of public education, public safety and general public well being. These are “shall do,” Gardner said, but only in that the Legislature must develop a way to do them. The funding, or the appropriation power, is left to the Legislature.

What’s different about HJR 23 is that, as now written, it would insert a “shall do” provision that actually allocates money without the Legislature having a say. Since the Legislature still has to appropriate for education, public safety and other needs with what’s left – the two-thirds of the POMV draw – the effect of this is that money is taken first for the dividend with the leftover going to the public programs.

In effect, it puts the PFD as first in line for money ahead of education and public safety, Gardner said. Because of this HJR 23 faces a big risk before the state’s high court, he said.

The solution is to substitute “may” for “shall,” so that the Legislature “may” appropriate for dividends, but with no mandate, Gardner said.

Of course, that nullifies the mandatory nature of the amendment and essentially preserves the status quo, in that legally the Legislature now “may” appropriate for the PFD at whatever amount it wants to.

There is a formula for the PFD in statute but lawmakers are not legally bound to it and for the last two years the appropriation has been less that the amount stipulated in the formula.

If this change is made the allocation structure would still go into the Constitution but the payment of the PFD would still be subject to legislative appropriation. However, even if not mandated the presence of the allocation structure in the Constitution with the “may” provision on the dividend would make it likely that legislators would respect the intent, Gardner said.

This is similar to the way legislators almost always respect revenue sources for the budget that are “designated” for certain programs. True dedicated funds are not allowed by the Constitution but the intent of designated funds, technically accounts in the General Fund, are usually followed.

Tim Bradner is editor of Alaska Legislative Digest and is the Atwood Visiting Professor of Journalism at University of Alaska Anchorage this year