POMV bill moves to the full House and Senate

The Legislature is poised to vote on a landmark bill changing the way Alaska finances its state government.

A House-Senate conference committee approved a compromise version of Senate Bill 26 Tuesday, May 8, sending the bill to the full House and Senate for final approval. It is not certain when the vote will be held.

The bill establishes a percent-of-market value, or POMV, in state law to guide the withdrawal of Permanent Fund earnings each year to help fund the state budget. SB 26 was approved last year by both the state Senate and House but in different versions, and the bill has been in the conference committee for over a while legislators worked out areas of disagreement, including on the Permanent Fund Dividend.

The compromise version approved Tuesday sets a POMV rate at 5.25 percent of the Fund’s total value, now about $64 billion, but also requires averaging of the Fund’s value over five years for the actual withdrawal.

“What this means is that the effective rate will be a 4.35 percent withdrawal for Fiscal Year 2019,” said Sen. Anna MacKinnon, R-Eagle River, a member of the conference committee.

Under the compromise the POMV percentage drops to 5 percent in 2021, which means that with the averaging the actual withdrawal would be less.

Estimates are that the withdrawal for FY 2019 would bring about $2.8 billion into the state General Fund of which about $1 billion would be used to finance the 2018 Permanent Fund dividend, which has been at $1,600 in the state operating budget.

That would leave about $1.8 billion to help finance the budget.

Under SB 26 as now written an inflation-proofing payment from the Permanent Fund’s earnings is authorized, but would be outside the POMV withdrawal.

Rep. Paul Seaton, R-Homer, said the compromise bill puts sideboards on the ability of the Legislature to fund operations from earnings of the Fund. Under current law legislators can appropriate any amount of money from the Fund’s earnings reserve, which now totals about $17 billion in value.

By limiting the withdrawal to the POMV percentage, “this is a structural limit on how much the Legislature can take,” Seaton said.

MacKinnon said the new money brought in under SB 26 and the state’s ordinary income, mostly from oil, will still leave a gap of several hundred million dollars in covering the FY 2019 budget, which is now estimated at about $4.6 billion including the state operating and capital budgets.

“We will still need a withdrawal from the Constitutional Budget Reserve,” a separate savings account that still has some funds, MacKinnon said.

Unlike earlier versions of SB 26 the compromise has no specific allocation for the PFD. Instead, the withdrawal under the POMV is to cover both the budget and the dividend. Legislators would have to decide every year on how much to spend on each.

Previously, the version of SB 26 passed by the Senate had an allocation of 75 percent of the money withdrawn from earnings and 25 percent for the dividend. The House version had a 70 percent allocation to the budget and 30 percent allocation to PFDs.

However, SB 26 also doesn’t change the formula, also in statute, guiding how the dividend is calculated. Current law, which would be unaffected by passage of SB 26, provides for the dividends to be paid from 50 percent of realized earnings each year, or cash income from asset sales, rents or bond interest, but also averaged over the previous five years.

Legislators recently calculated that the 2018 PFD would be about $2,700 based on the current law, but the Department of Revenue, which does the calculations, could not confirm the number.

Despite that apparent contradiction legislators will have to decide the actual appropriation amount for the dividend each year, and that is essentially what they have done over the last three years. Despite the fact that the Legislature makes laws, legislators are not bound to follow them.