New PF Report Shows Fiscal Crisis Looming

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Created on Thursday, 01 August 2024 15:32

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By JAMES BROOKS

Alaska Beacon

Financial documents published Wednesday by the Alaska Permanent Fund Corp.  show the fund lacks enough spendable money to immediately pay for items in the state’s annual budget, a sign that the state’s top source of general-purpose revenue is on course for a future crisis.

This year, lawmakers and Gov. Mike Dunleavy approved a $1 billion transfer from the spendable portion of the Permanent Fund to the constitutionally protected principal. 

As of July 1, there was only $571.7 million available to transfer. 

Because the fund is expected to earn additional money in the coming months, the shortfall isn’t an immediate problem, but it is the latest signal that the fund’s ability to pay for state services and the Permanent Fund dividend may soon be in jeopardy.

“Certainly, this is the canary in the coal mine,” said Deven Mitchell, CEO of the Alaska Permanent Fund Corp., in a conversation with reporters on Wednesday. 

The Permanent Fund is the No. 1 source of general-purpose revenue for the state. Oil revenue, plus all other taxes, is expected to generate $2.8 billion for the state during the fiscal year that began July 1. The Permanent Fund, meanwhile, will transfer $3.7 billion to the state treasury, paying for state services and this year’s Permanent Fund dividend.

This year’s transfer isn’t in danger, nor is next year’s, but transfers beyond 2026 may be.

“I think that that would be in the late 2020s to early 2030s in the various modeling methods that we use,” Mitchell said. “So we have a pretty long runway before it fully breaks. It’s just that, if your car starts making a funny noise, it’s usually cheaper to get it fixed right then than wait until it blows up.” 

Fund officials have repeatedly issued warnings about the impending problem, which is twofold: Only part of the fund is spendable, and withdrawals from that spendable portion have exceeded deposits.

In February, the fund’s board of trustees issued a policy paper listing possible fixes, but state legislators adjourned from the Capitol this spring without implementing any of those ideas.

As a whole, the fund is worth more than $81 billion, but that’s dropping, and the spendable portion, known as the earnings reserve, dwindled to just $5.3 billion as of July 1. Most of that amount — $3.8 billion — is reserved for next year’s transfer to the state treasury. 

Excluding unrealized gains — things like real estate that haven’t been sold but are worth more than when they were purchased — leaves just $571 million, less than the amount needed to make the $1 billion transfer from the earnings reserve to the principal. 

Mitchell said the fund made a policy call to prioritize the transfers to the state treasury rather than the inflation-proofing transfer. 

The worry is that eventually, there won’t be enough money to pay for either.

Barring action by the Legislature and governor, that would trigger an immediate state fiscal crisis, with massive tax increases and budget cuts possible.

“It’s hard for us to predict with any accuracy when it might get scary,” said Valerie Mertz, the corporation’s chief financial officer.

That’s because the corporation’s revenue projections are based on averages, and a handful of poor-performing years could bring the crisis sooner.

“It could be anywhere from two years from now to 10 years from now,” Mertz said.

Mitchell said that fixing the issue is in the hands of the state’s elected officials because the corporation’s powers are limited by state law and the Alaska Constitution.

Lawmakers might extend their deadline by canceling inflation-proofing transfers from the earnings reserve to the non-spendable part of the Permanent Fund, but that only delays the problem. Permanently fixing it likely involves significantly reducing the amount taken from the fund each year, or merging the spendable and non-spendable portions of the fund, which would take a constitutional amendment.

Rep. DeLena Johnson, R-Palmer, is co-chair of the House Finance Committee, which focuses on the budget.

She said she’s not prepared to rule out the possibility that the Legislature can fix the problem in the next two years, but at the moment doesn’t see it as likely.

“It’s going to be difficult because we have to have a vision for what we want to see at the end, and I don’t know that we have a common vision right now,” she said.

The issue, said Sen. Bert Stedman, R-Sitka and co-chair of the Senate Finance Committee, is that arguments over how much to take from the Permanent Fund have become inexorably linked to arguments over how to spend that money.

For the past eight years, state lawmakers haven’t been able to set a formula for paying the annual Permanent Fund dividend. 

In 2017, the House passed a proposal to spend 33% of the annual Permanent Fund transfer on the dividend, while the Senate passed one to spend 25% on it. The two sides failed to reach a compromise. 

In 2023, the Senate again passed a bill to spend 25% of the annual draw on the dividend, though the amount would increase to 50% if the Legislature passed measures to raise new revenue. The House did not pass the bill. 

No dividend formula change has reached the governor’s desk.

Without a solution to the dividend question, Stedman is not optimistic about a fix for the Permanent Fund’s bleeding.

“No, not unless there’s some leadership out of the third floor,” he said, referring to the location of Dunleavy’s office in the Capitol.

Jeff Turner, the governor’s communications director, said by email that the governor has been trying to address the issue since his first term in office, without success.

The governor proposed a constitutional amendment on the dividend in 2021 and called four special sessions that year on fiscal issues.

Dunleavy proposed a fiscal special session in 2023 but was told by lawmakers that it likely wouldn’t be productive.

“Governor Dunleavy has tried for nearly six years to sit down with lawmakers and hammer out a fiscal plan. That can’t happen if they don’t participate. If legislators don’t agree with his proposed solutions, they should bring their own ideas to the table,” Turner said.

Mitchell, at the Permanent Fund, acknowledged the difficulties facing the state’s elected officials but said he’s not prepared to give up hope. 

He said lawmakers are becoming more aware of the impending crisis by the day, and he sees “more of a willingness to consider the potential of making some adjustments.”

“In particular,” Mitchell said, “the closer you get to a cliff, the easier it is to decide to stop.”

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https://alaskabeacon.com/james-brooks

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