Alaska is blessed with natural beauty and natural resources. In many ways, our State is the envy of governments around the world. People from outside spend thousands of dollars to enjoy what we see every day. Meanwhile, we pay no income or sales tax, plus receive a dividend check each year. Unfortunately, that last sentence won’t be true for much longer. Crashing oil prices, a collapsing stock market, and resistance to fiscal restraint has put us on a path to the death of the Permanent Fund Dividend (PFD).
Within the span of five years, the PFD has been reframed as a welfare payment rather than a wealth distribution. As a result, it is a fraction of its former self. At the current speed and trajectory, the PFD will be dead within the next year or two.
Brief History of the PFD
If you’re new to Alaska, or are reading this from the lower 48 states, here’s the short story.
When Alaska became the 49th state in the union, way back in 1959, it was a land of wide-open wilderness. There were about 224,000 Alaskans spread across over 570,641 square miles. Fishing, mining, and timber were the major sources of economic activity, along with a significant military presence.
A $900 Million Windfall
Our world changed on September 10, 1969. The Department of Revenue received $900,220,590 in bonus bids during the first lease sale after the Prudhoe Bay discovery. For comparison, the State government collected about $112 million in each of the prior two years.
In other words, the government could have repealed every form of tax in statute, and still covered over a decade’s worth of spending with just those lease sale receipts. And yet, without changing any revenue laws, that incredible amount of money was gone within just five years.
A Divided Population
By 1973, plans to develop those leases had taken root. After lengthy negotiations, and heavy resistance, leaseholders secured the rights-of-way and financing to complete the greatest engineering project of a lifetime – the 800-mile Trans-Alaska Pipeline System (TAPS).
Before oil started flowing in 1977, the people of Alaska were already debating what to do with the massive increase in cash flow to the treasury that would accompany oil flowing down the pipeline. Government spending was already accelerating at a rapid clip. By 1979, the State budget was 964% larger than in 1959. And, the experience of how quickly the unfathomable $900 million disappeared weighed heavily on everyone’s minds.
The population had also grown dramatically in the 1970s – as thousands of people flocked to Alaska seeking a healthy paycheck to work on building TAPS. By 1980, Alaska’s population had doubled since statehood. At that point, the number of newcomers was nearly equal to the number of “real” Alaskans.
Consequently, two camps of political leaders formed. On one side, there were those that wanted to use the coming oil revenues to grow the size of the state. On the other, there were those that wanted to enrich the “true” Alaskans rather than those that were attracted to the state for money.
By 1981, the amount of money flowing into the state’s coffers each year exceeded the amount of that 1969 lease sale. The State government had so much money that they could do almost everything they could dream up. The sheer magnitude of cash made compromise easy.
Those that wanted to spend the money on bringing the young state into the modern era had plenty to spend on things like new schools, more roads, and cultural amenities that would attract people from places that had such things. The capital budgets during the early 1980s were truly breathtaking in scale compared to the years before and after.
Others wanted to protect the state’s endowment from legislative discretion. Rather than build the state for newcomers, they wanted to distribute the resources to the people that truly owned them. After much resistance, the Permanent Fund was established – protecting 25% of our royalty receipts from the desires of the current generation, and allowing them to endure for all future Alaskans.
Additionally, Governor Hammond was able to reserve half of the earnings from this new perpetual revenue source for individual Alaskans. He argued that distributing the money through government spending favored only those Alaskans that were best represented by special interest groups. Following the advice of Noble Laureate Milton Friedman, the legislature agreed to allow individual Alaskans to decide the best use of their money.
Taxes vs. Dividends
Importantly, the legislature also repealed the state’s personal income tax at the same time. Many political observers and elected officials found it unconscionable and reprehensible to charge a tax on the people while putting money into savings. The sentiment resonated with anyone that viewed the PFD as a program that distributes government money to the population.
This perceived notion that a PFD and a tax cannot coexist lived in the background of political debates for over 20 years. In the 1980s, and through most of the 1990s, there was enough money that the philosophical conflict didn’t matter. Alaskans received a full PFD without much debate; meanwhile, there was enough oil money to pay the bills. That all changed when oil prices crashed.
The Rise of the PFD debate
In the late 1990s, oil prices hit the floor. Suddenly, there wasn’t enough oil tax money and remaining royalties to pay for the meager operating expenditures and anemic capital budget. The budget reserve ran to nearly empty, and the only remaining place to look was the Permanent Fund. Alaskans aggressively defended the PFD, preventing changes to the statute or the constitutional rules.
Legislators offered several creative ways to get the public on board, but to no avail. One well-remembered idea was to dissolve the Permanent Fund after paying each Alaskan one last check of $25,000 apiece. The public rejected that idea and continued to receive PFDs according to the formula in law.
That forced the conversation to taxes, which were also strongly opposed. Of course, it is impossible to close a deficit without increasing revenues or decreasing spending. But, Alaska got bailed out by increasing oil prices.
The increased revenues came without personal taxes, and the debate about which income to confiscate was delayed for another 20 years. But, the idea had resurfaced. The only way to pay for all of the services Alaskans want is to either reduce their PFD income or to reduce their other household income.
2014 to present
Politicians had learned that talking about changing the PFD was a third-rail which would assure their defeat in the next election. But, when the budget would not balance in 2016, Governor Walker grabbed that third-rail with both hands by vetoing half of the PFD.
The action was immediately challenged all the way to the Alaska Supreme Court. And, the highest court in the Last Frontier determined that the PFD is a government program, with a funding amount that could be determined by appropriation rather than by statute. By making that ruling, the Supreme Court effectively advised the legislative branch that any statute related to appropriations could be ignored without changing the underlying law. With that decision the PFD went from sacred to secondary in the legislative process.
Reframing the Issue
The Supreme Court finding completely changed the conversation. It reframed the question regarding the PFD altogether. By viewing the PFD as a government program, it became in direct conflict with things like education funding. Therefore, a reduction of the PFD could be viewed as a budget cut rather than a decrease in household income.
When revenues don’t allow funding for traditional budget items and the statutory PFD, the familiar conflict arises. However, the new interpretation empowered the legislature to ignore the dividend program formula in the name of balancing the budget.
Just like that, the PFD was reframed as a glorified welfare program. And, the wealthier Alaskans reject the idea that we should raise taxes with one hand while distributing it with the other. Such a combination of policies would be nothing more than an inefficient redistribution of wealth from their perspective. David Rose summed up this mentality well. In his biography, he says that people would be happy to pay taxes to support a well-run program that helps those in need, but would reject the idea of taking from one person so that another can afford a vacation.
In fact, that is precisely how the debate has unfolded. After five years of reframing the issue, few members of the legislature or the population still view the PFD the way it was originally intended – as a distribution of the people’s wealth to the resource owners. The government is no longer viewed as a passthrough management agency handling our resources on our behalf. Now it is viewed as a parental figure doling out an allowance it thinks it can afford and that we deserve.
Current Status of the Permanent Fund
In every year since the 2016 veto, the legislature has made an ad hoc appropriation to the dividend fund. Every dollar of revenue passing through the government goes to protect public spending first. Only if there are revenues surplus to what elected officials want to spend and save, is a dividend paid.
In addition, the revenue limit set by SB26 requires that any fund earnings that contribute to the budget must reduce the money available to pay the PFD. Consequently, any time that state revenues fall, or expenditures rise, the PFD shrinks. That is the simple math that results from the current structure. Therefore, preserving the PFD would require raising taxes or reducing spending – an unlikely outcome under the current frame.
In effect, the PFD will now be set each year by subtracting desired spending levels from total available funds (not actual revenues). And, this “leftover” approach to the PFD doesn’t even require a change to the statute – which is unlikely ever to be followed again.
So, what kind of dividends will this leftover approach provide? The answer to that question changed significantly in March 2020. First, a stock market crash changed the outlook of how much of the Permanent Fund earnings are available. Assuming the fiscal year ends about where it is today, and assuming the Fund earns a 7% nominal rate of return moving forward, here is how the available funds have shifted.
In addition to a reduced fund balance from a crashing stock market, collapsing oil prices also dampen the outlook on oil revenues. Therefore, the amount of money available for appropriation is far less than previously believed.
Consequently, the amount of money leftover for a PFD is also much different. In fact, the legislature had to spend over $1 billion from the budget reserve to pay a meager $1,000 PFD in October 2020. After those withdraws, that savings account is down to about $400 million now – which is below what is needed to manage the State’s cash flows.
It is very unlikely that FY22 revenues, plus the available earnings from the permanent fund under SB26, will cover even a flat-funded budget. In other words, there won’t be any money left over to pay a PFD next year. Without adequate reserves, the next legislature can’t use the savings account to bail them out again.
And, the problem does not appear to go away in the future (unless oil prices improve and the stock market recovers). Even holding the budget flat would generate a zero PFD for the next eight years.
It’s possible that some creative accounting will allow for a small dividend next year. And, perhaps revisiting the POMV law can allow a distribution for another decade. But, if legislators are not willing to pass a tax while imposing fiscal restraint, a zero PFD is on the way. And, once that first experience of paying no PFD occurs, it seems unlikely that it will ever be paid again.