Gov. Dunleavy’s $6.3 billion Permanent Fund grab

Gov. Mike Dunleavy is beating the big-dividend drum again. In his annual State of the State address, the governor once more argued for a whopping $5,000 in direct payments to Alaska residents, despite a massively unbalanced budget and depleted savings. The plan will no doubt be popular among many; after all, who doesn’t like free money? But it’s also the most shortsighted budget idea Alaska has seen in a generation, one that would kneecap Alaskans’ future by – for the first time ever – overspending from an account intended to last forever. It’s called the Permanent Fund for a reason.

Alaska’s best idea

In the 1970s, Gov. Jay Hammond and his legislative allies were disturbed by a pair of problems. First, because the state was flush with oil revenue, Alaskans (and many of their elected representatives) were all too eager to spend the windfall on all manner of items, keeping little in savings and leaving the state wide open to the punishing boom-bust cycle of oil revenues. Second, Hammond knew there would come a time when that boom-bust cycle would end with a permanent bust — when the wells ran dry, or close enough that they couldn’t nearly cover state expenses. To solve both problems, Hammond decided, as he wrote in his book “Diapering the Devil,” that he “wanted to transform oil wells pumping oil for a finite period, into money wells pumping money for infinity.” Hammond’s foresight was incredible: Nearly 50 years ago, he saw the fiscal mess Alaska would be in a few generations’ time, and did his best to try and counter it.

To accomplish that feat, Hammond and lawmakers established the Permanent Fund, where 25% of the state’s oil revenue flowed into a constitutionally protected account. That account, managed capably by the Alaska Permanent Fund Corporation for decades, has grown tremendously thanks to its protection from annual spending — from a $734,000 balance in February 1977 to an incredible $71.7 billion at the end of 2020. At the time, it was a novel, forward-thinking plan; in the time since, smart money managers have set up similar frameworks that endowed accounts like Norway’s trillion-dollar pension fund. Because the Permanent Fund generates earnings from its holdings — everything from mutual funds to real estate — it’s well on its way to fulfilling Hammond’s dream: a “money well” that can help sustain our state in a post-oil future that draws nearer every day.

The plan almost worked as designed, but growing state budgets outpaced the growth of the Permanent Fund. Today, the Fund isn’t yet big enough for its earnings to bridge our fiscal gap. But if we can recognize that, and maintain fiscal discipline, it could achieve that goal within the decade. And that’s why Gov. Dunleavy’s big-Permanent Fund dividend plan would be so harmful to our state’s future.

The Permanent Fund dividend or the Permanent Dividend Fund?

Gov. Hammond never trusted future Legislatures to keep their hands off the Permanent Fund honey-pot. He wanted to hold them accountable, to make sure the fund wasn’t tapped for short-term funding needs (in a 2004 interview, Hammond had two words for the perception of the Fund as a simple rainy-day account that could provide for such spending: “Bull feathers.”). The PFD was devised as a way to keep Alaskans paying attention to how the state was spending money, so that the people would hold leaders accountable and defend the fund from those inclined to raid it. Hammond also hoped that Alaskans being given a share of the revenue from resource development would motivate them to support responsible development (and also oppose projects that were poor risks).

In hindsight, this was overoptimistic: Most Alaskans have neither an appetite for learning about which North Slope fields are being developed, nor a working knowledge of the size of the state budget or the Permanent Fund itself. What the dividend did get Alaskans to pay attention to was its own size — the amount of the check they receive each year. It’s no surprise, then, that candidates promising big dividends to Alaskans have found success at the polls, particularly in recent years. Culturally, we’ve focused too much on the payout, when we should have been looking to maximize the account balance. The dividend has become the tail wagging the dog for Alaska’s budget and, in a bitter irony, the mechanism that was supposed to defend the Permanent Fund now threatens its future.

Although the PFD amount has historically been generated by a straightforward formula, that changed after oil revenues collapsed several years ago. In 2016, as oil prices plummeted and after years of bloated state spending, Gov. Bill Walker (and, starting in 2017, the Legislature) reduced the PFD amount to avoid unsustainable draws on savings and draconian cuts to state services. This decoupling of the PFD from the traditional formula has meant that each year since, legislators have set the PFD amount themselves. This was the right thing to do to maintain fiscal discipline as state revenues fell, but politically, it’s become a dangerous practice. Debates over the size of the dividend consume the vast majority of time and energy during legislative sessions and also have left the door open for big, account-draining PFD draws, like the one Gov. Dunleavy is pushing this year.

More money, more problems

This year, Gov. Dunleavy is arguing for a massive $5,000 payment to each PFD recipient by - for the first time ever – removing $3.2 billion from the Permanent Fund itself on top of the amount allowed by law. We can afford it, he has said, because of the Fund’s strong earnings last year, which he claims total $11 billion. This number is false, and the governor knows it. The Permanent Fund started 2020 at a value of nearly $67 billion, and ended the year at $71.7 billion — a gain of a little less than $5 billion. The governor’s plan would have us spend more savings than the fund’s entire earnings in 2020, a path that would not only diminish the overall size of the Fund but also its ability to be a money well — to generate funds for the state and Alaskans in perpetuity. If the $6.3 billion total that the governor wants to spend from the Permanent Fund this year were kept in the Fund instead, assuming a conservative 5% annual rate of return, it would generate more than $300 million next year alone — and, thanks to the miracle of compound interest, more and more every year after that. That’s more than the amount the state spends on the entire University of Alaska system.

Beyond the financial irresponsibility of dipping into the Fund based on the expediency of the moment, doing so would set a perilous precedent. Opening that Pandora’s box today will make it easier and easier to justify in the future. Hammond was right not to trust future Legislatures with Alaska’s most precious asset, and Gov. Dunleavy should be wary as well. We must marshal the discipline to preserve the fund and spare our children from the fiscal problems Alaska is grappling with today.

Big checks are a tempting prospect, given the economic hardship wrought by the COVID-19 pandemic. The pain Alaskans and businesses are feeling as a result is real. But the governor’s free-spending plan is one Alaskans can’t afford, for the sake of future generations that will be irreparably shortchanged by our choice to drain the “money well” early. If we can convince our representatives in Juneau to safeguard the Permanent Fund and not raid its earnings for a one-time spending spree, we’ll be able to look our children and grandchildren in the eyes and know we did what we could to help secure their future.