Unfinished business: Legislators head back to Juneau to wrestle with PFD, deficit, new taxes and more

State Legislators are back in Juneau Aug. 16 in yet another special session – the third so far this year – trying to untangle a web of knotty issues related to the Permanent Fund Dividend, or PFD, and, more recently, the Power Cost Equalization program that helps support affordable residential electricity in small communities.

Here’s where things stand as lawmakers pack their backs again:

The state budget for next year is enacted, for the most part, after a cliff-hanger at the end of June when state government almost shut down due to the lack of an approved spending plan.

There had been disagreements all spring over the size of the PFD and in late June the House Republican Minority balked at approving a needed effective date for the budget over the lack of progress on the dividend and constitutional amendments proposed by Gov. Mike Dunleavy.

The same disagreement basically derailed a withdrawal of funds from the Constitutional Budget Reserve, or CBR, a state savings account. The money was needed to fund certain capital, or construction, projects including some in the Matanuska-Susitna Borough.

Just as with the budget effective date, a three-quarters legislative majority is needed to withdraw money from the CBR. It wasn’t achieved in the House, so the projects remain stalled.

Republicans in the House agreed at the last minute to an effective date for the budget, preventing a shutdown, when the House Majority, led by Democrats, and the Senate agreed to form a bipartisan working group to delve deeply into state financial issues, the PFD, and the governor’s proposed changes to the Constitution to guarantee a dividend. The working group plan, whatever it is, may surface next week when the Legislature meets.

Finding the money to fund the higher dividend is the major obstacle. The governor has proposed new revenues to help pay for a larger dividend but Dunleavy has not put his stamp of approval on any new tax.

However, the Department of Revenue did brief the legislative working group on several options Aug. 6. Options presented by the revenue department include two variations of a state sales tax, one without exemptions like food and another with exemptions along with changes to state oil and gas taxes, a gambling tax and taxes on “digital business,” or online retail sales.

There was also an innovative proposal to sell carbon offset credits on undeveloped state lands, an industry growing worldwide as industries seek ways to reduce their greenhouse gas emissions. Several Alaska Native corporations, which own large land tracts, are in this field.

New revenues are needed because a core part of the governor’s PFD plan is a proposal to split the annual contribution made from Permanent Fund earnings to support the budget.

The Fund now pays over $3 billion a year to help fund the budget, covering about 70 percent of state general fund expenses (oil used to carry this load, but now pays only about 25 percent).

Dunleavy’s proposal, now called the “50-50” plan, would be placed in the Constitution and would become a guarantee of the dividend.

If this were enacted it would result in a PFD of $2,353 paid out later year and growing each year to reach $3,365 per check in 2030, according to estimates by the revenue department.

The problem is that a large deficit is created when half of the Permanent Fund contribution is taken for the dividend. To deal with this, Dunleavy has proposed that the unspecified new revenues, most likely taxes, could pay for part of it with withdrawals from savings covering the remaining deficits for a period of years.

Those would continue, under the governor’s plan, until the Permanent Fund’s growth and its earnings reach a point where the budget would be balanced even with the 50-50 split and larger dividend.

The Permanent Fund estimates that if the Fund’s growth continues at even modest levels it could each nearly $100 billion by 2030. Under the Fund’s annual contribution to the state of 5 percent of the total Fund value, this would amount to $5 billion billion a year based on a $100 billion market value.

The actual contribution is less, however, because the payment is averaged over the previous five years. It will still be a substantial sum, however.

Efforts would also be made for continued reductions in spending

under the governor’s plan but the kinds of very large spending cuts attempted in 2019, Dunleavy’s first year in office, do not seem likely.

Another proposal on the table in the special session will be a cap on spending in the Constitution that would replace the spending cap that is already there, but which is now considered obsolete.

The governor is proposing another constitutional amendment that would do this and it is supported by several legislators.

Details of a spending cap could be complex, however, because some provisions for emergencies such as for natural disasters or a pandemic like COVID-19 will be needed.

Other parts may become controversial such as how much inflation allowances may be allowed, for example in personnel costs.

Although it adds a complication to the special session it seems inevitable that several legislators will want to see some mechanism for controlling expenses if there are to be new taxes.

Dunleavy has not put his stamp of approval on any new tax.

Not all PFD plans create a big deficit or require new taxes, however. Late the regular legislative session lawmakers approved a compromise PFD that would pay $1,100 per check. Under some fiscal scenarios it, too, would create a deficit but one that could be managed without new taxes.

A $525 dividend, also put forth as an alternative, could be paid from existing revenues and would create no deficit. The governor rejected that, however.

The newest twist, however, is the failure in the Legislature, and again by the lack of a three-quarters vote, of a “reverse sweep” motion to halt dismembering of a $1.1 billion fund that supports Power Cost Equalization payments to rural utilities. This has now resulted, as of July 1, in a halt to payments to the utilities, many of them community-owned, which puts many under serious financial stress.

Alaska Village Electric Cooperative, the state’s largest rural utility, is cut off from about $1 million a month in PCE support, for example. AVEC’s reserves are not strong enough to weather that for more than a short period, and if rural residential electric consumers are asked to make up the difference, the financial stress will be transferred to rural families.

The political problem is that like the budget affective date and the CBR withdrawal, it takes three quarters of the Legislature voting to reverse the sweep, or 15 of the 20 state senators and 30 of 40 members of the House.

Sorting all this out will be complicated. The key to the larger PFD, the governor’s goal, is money and with large budget cuts seemingly off the table taxes seem the only solution.

But there will be real pushback from many legislators, and the public, to imposing taxes to pay higher dividends, taking money from some peoples’ pockets to put in others’.

One other option, almost universally felt to be worse, is taking more money from Permanent Fund earnings. Financial experts said that the current 5 percent withdrawal rate, averaged over five years, is the maximum that can be taken without endangering the long-term sustainability of the Permanent Fund.

For legislators, none of this will be easy.