As Alaska continues to work through falling oil revenues, changes to its Permanent Fund appear inevitable. There are currently six resolutions up for debate that would adjust the way the Permanent Fund functions. This article takes a high-level look at the differences and similarities between those proposals.
The Current Language
Before we look at what the proposed amendments do, it might be good to remember what the current language says:
Article IX – Finance and Taxation
§ 15. Alaska Permanent Fund
“At least twenty-five per cent of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral revenue sharing payments and bonuses received by the State shall be placed in a permanent fund, the principal of which shall be used only for those income-producing investments specifically designated by law as eligible for permanent fund investments. All income from the permanent fund shall be deposited in the general fund unless otherwise provided by law. [Amended 1976]“Alaska State Constitution
Proposed Changes to Current Language
All the resolutions propose to alter the language in section 15 and add new subsections to it. Each of the proposals offer similar changes to account for the new POMV approach while maintaining the current savings rule. There are some small deviations in the wording, but none of them are substantially different in effect. Here is how the final amendment to the current language would probably read:
“(a) At least twenty-five percent of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral revenue sharing payments and bonuses received by the State shall be placed in a permanent fund, which shall be used for income-producing investments specifically designated by law as eligible for permanent fund investments. Except as provided in this section, the principal of and all income from the permanent fund shall be retained in the fund.”
Inserting a Percent of Market Value (POMV) Approach
All six of the proposed amendments convert the Permanent Fund and the Earnings Reserve into a POMV spending rule. Under the current constitutional provision, all earnings from the fund are available to the legislature. However, there is a current statutory spending rule that limits the use of earnings to 5% of the 5-year average market value. Each of the resolutions under consideration cement that approach into the constitution, although they use slightly different methods.
|CSHJR 1 (HJUD)||5% of average market value during first five of last six years|
|CSHJR 7 (HSTA)||5% of average market value during first five of last six years|
|HJR 10||4% of market value as of the last day of the year|
|CSSJR 1 (SJUD)||5% of average market value during first five of last six years|
|CSSJR 6 (SJUD)||5% of average market value during first five of last six years|
|SJR 18||5% of average market value during last five years|
You’ll notice that the spending rules are all very similar. Four of the resolutions use an average of the first five of the last six years. Doing this allows the legislature to know how much money will be available for the next budget with no uncertainty. But, doing this also reduces the size of that average (because the balance grows each year from royalty deposits and inflation proofing). HJR 10 would use the current year balance as the base. Therefore, the base is larger and the smaller 4% rule is actually closer to the alternatives than a casual observer might assume. I’ll show you the numbers below.
It’s also worth pointing out that earlier iterations of these bills had some provisions that have since been removed. In particular, the Governor’s resolutions didn’t define the percentage of the draw at all. It merely said that the legislature would need to set the rate in statute. Pretty much everyone in the Capitol agreed that was a bad idea. Another idea that died quickly was a super-super majority vote (5/6) to overdraw the POMV rate. The sponsor removed that provision before the bill touched the first committee’s hands.
Permanent Fund Dividend
Five of the six proposed amendments would constitutionalize the PFD. How they do that is the main difference between the proposals. The most popular idea within these options seems to be a fixed percentage of the transfer from the fund going to the people. The three proposals that define that fixed percentage set it at 50%, which preserves the historic relationship between the use of funds for the people and the general fund.
The approach in SJR 18 is the newest alternative, which would split the fund rather than the distribution. The proposal from Senator Von Imhof sets the balance of the dividend generating fund (called the Alaska Resource Ownership Revenue Account) at the amount of unpaid dividends during the past six years ($6.77 billion).
|Resolution ||PFD Calculation|
|CSHJR 1 (HJUD)||No PFD|
|CSHJR 7 (HSTA)||Requires PFD but leaves it up to the legislature to establish the formula (requires a public vote to change that formula).|
|HJR 10||50% of POMV amount|
|CSSJR 1 (SJUD)||Greater of 50% of POMV or 21% of net income from last five years.|
|CSSJR 6 (SJUD)||50% of POMV|
|SJR 18||5% of average market value of ARORA balance ($6.77 billion starting balance) during last five years|
The following graph shows the dividends that each approach generates:
Note: Because HJR 1 does not constitutionalize the PFD, it is modeled as zero here. In reality, the legislature could still elect to pay a PFD as part of the budget process.
There are three miscellaneous provisions within these proposals that are worth noting. First, most of the amendments allow the Permanent Fund earnings to pay for the associate costs of operating and managing the fund. Under current law, those expenses come out of the general fund as part of the budget. Second, all the proposals would transfer the balance of the Earnings Reserve Account (ERA) into the Permanent Fund. This change is appropriate because a fund managed with a POMV spending rule doesn’t need a holding account. But making this transfer does create some cash flow management problems the legislature would need to deal with. Finally, the version of SJR 6 that passed out of Senate Judiciary (the governor’s plan) included a provision to constitutionalize the Power Cost Equalization (PCE) program.
Available Funding for the Budget
Each of the proposed amendments create a structure for drawing from the endowment and for paying dividends to Alaskans. Combined with other current revenues, the money remaining after paying the dividend are available for government services. Therefore, any government spending above the available revenues would need to come from taxation. The difference between these lines and that spending level is an implied tax.
From this graphic you may glean some insight into why HJR 1 (with no PFD and the largest amount of money available for government services) has a list of Democratic cosponsors while SJR 1 (with the largest PFD and the smallest amount available for government) has the support of mostly Republican legislators. SJR 6, as amended to match the Governor’s plan, falls in between.
The natural question to ask here is whether these plans adequately fund government or if additional revenues would be required. To answer that question, we need an assumption about future spending needs. And, because of the power of compounding, the outputs of any model looking far enough into the future is incredibly sensitive to this assumption.
For example, here is how big the surplus/deficit would be going forward under the different proposals if the budget grows at the rate of inflation:
You’ll notice that because HJR 1 doesn’t pay a dividend, there is an immediate surplus. That surplus grows larger over time as that money sits in the fund generating more revenues. Similarly, SJR 18 also generates over a billion extra dollars of revenue each year. Assuming that money stays in the account to compound rather than to grow the budget, that surplus continues year after year. Meanwhile, the other four proposals generate perpetual deficits at this spending path assumption. SJR1 and HJR 7, with the largest dividends, results in the biggest need for alternative revenues. It’s also worth pointing out that SJR 6 would require roughly $1 billion per year of new revenues to balance a budget growing at this rate.
But look what happens when you change the spending path assumption just a little bit. As I’ve written before, there is no reason to assume that the budget must grow with inflation. The question of increasing funding runs into much more resistance when that growth must come from the people’s pockets. If we assume that need to find efficiencies and reduce programs can put enough pressure on the budget to limit its growth to 1% per year, the entire picture changes. Here is the same graph with the lower growth path:
Suddenly, SJR 6 and HJR 10 don’t generate perpetual deficits. Rather, they post temporary shortfalls until revenues catch up. At this budget growth rate, the State’s financial problems are solved without taxes or budget cuts. Just a simple $3 billion transfer to the CBR would fill the temporary gap. Meanwhile, HJR 1 and SJR 18 (in its current form) take to much from the people for no clear purpose and SJR 1 writes everything that is wrong with our current laws into stone.
Comparing the proposed constitutional amendments highlights something I’ve been saying for a few years now: The State’s financial problems are not as bad as we’ve been led to believe. Our “crisis” is a product of an assumption that government must grow and we need a tax to feed it. In reality, budget growth reacts to available revenues. With our reduced revenues, we’ve seen reduced spending. Just a few more years of necessary fiscal restraint will likely solve the problem on its own. That said, some constitutional language to solidify that restraint (SJR 5) and remove the contentious issues from the discussion (SJR 6) would go a long way toward that end.
While I would prefer a more robust structure that doesn’t put an arbitrary number in the constitution, an imperfect system improvement is still a welcome prospect. My analysis suggests that SJR 6 or HJR 10 can work. SJR 1, HJR 1, and HJR 7 (in its current form) cannot. SJR 18 is an interesting idea similar to something I’ve proposed in the past. With a simple modification to the amount of money in the royalty fund, it would actually be the best proposal being offered so far. Of course, there are any number of other ways that would work even better. That said, sometimes it’s better not to miss out on the good in pursuit of the perfect.