Alaska lawmakers near deal to spend Permanent Fund earnings on government

JUNEAU — The Alaska Legislature on Wednesday took its biggest step yet toward using the Permanent Fund's investment earnings to help fill the state's huge deficit, as a key committee unveiled a new draft proposal to start managing the fund like an endowment.

The proposal, Senate Bill 26, would allow lawmakers to spend about 5 percent of the oil-wealth fund, which is currently valued at $65 billion, each year.

But it leaves unresolved how the cash, about $2.7 billion in the state's next annual budget, would be split each year between government services and Permanent Fund dividends — a politically thorny question that took weeks to settle this year. Legislative leaders said they couldn't reach agreement on that point, but argued that it would still be a major accomplishment to set the 5 percent draw rate.

"This is as much as possible," said Bethel Democratic Sen. Lyman Hoffman, who sits on the House-Senate conference committee that's trying to negotiate a compromise on the two chambers' competing versions of the legislation. "It fills a big, big hole in the deficit."

SB 26 has been stuck in the conference committee for a full year, and the release of the proposal to the public Wednesday suggests that the two key caucuses — the mostly Republican Senate majority and the largely Democratic House majority — are finally nearing a deal.

Legislative leaders said SB 26 would fix more than 80 percent of the deficit, and they describe it as a critical piece of a broader agreement that will allow them to finish their annual session in Juneau.

Lawmakers, now in their third week of overtime, still haven't passed an annual operating budget for the state, and other important bills relating to public safety and Alaska's oil industry are also still in limbo.

Still, legislative leaders said they're optimistic that they're on track to finish their work before May 16. That's the last day they can keep working under a 121-day deadline set by the Alaska Constitution.

Lawmakers have been eyeing the Permanent Fund as a fix to Alaska's huge deficit for the past three years, since a crash in the oil revenues that once paid for the vast majority of government services.

But the proposals to change the management scheme for the fund would have also reduced the size of residents' annual dividend checks, and lawmakers haven't reached an agreement about how to do so.

Instead, the Legislature has chosen to cover the budget gap with its once-ample savings accounts, which this year are paying for nearly half of state spending.

[Related: Without action by lawmakers, Alaska's main savings account will soon be empty. What will they do?]

Those savings accounts are now nearly empty, forcing lawmakers to take action, according to Larry Persily, a former deputy revenue commissioner who now works as a legislative aide.

"We've got to do it. We have no choice," he said. "It's the mathematical reality."

While Wednesday's new version of SB 26 will guide how future lawmakers spend money from the Permanent Fund, it does not directly affect dividend payments.

Dividends have been paid for decades based on a legal formula that's tied to the fund's investment returns — though the formula has been set aside for the past two years, first by a line-item veto from Gov. Bill Walker and then based on an agreement by the Legislature.

Previous versions of SB 26 specified how much money would come out of the fund, then outlined how the cash would be split between dividends and general government each year.

But some lawmakers — particularly those in the largely Democratic House majority — are vehemently opposed to the way those proposals would reduce dividends over the long term.

Under the new version of SB 26, lawmakers would have to negotiate the dividends-government split each year.

"The debate on what the PFD should be was so contentious this year that that was the compromise that everyone was trying to get to: Let's take this one step at a time, baby steps," said Nome Democratic Rep. Neal Foster, one of the House's negotiators. "Right now, there's no consensus on getting a split."

In this year's budget, lawmakers have already agreed to spend some 37 percent of the $2.7 billion withdrawal from the fund, or $1 billion, on a $1,600 dividend. The rest of the cash would go toward government services.

[Related: Lawmakers agree on a $1,600 PFD for this year]

The new proposal released Wednesday still hasn't passed. In interviews and prepared statements, the bill's negotiators said they now plan to share and discuss it with their colleagues in hopes of building enough support for it to clear the House and Senate.

One member of the Senate's Democratic minority, Bill Wielechowski of Anchorage, made it clear in a Facebook post that he's firmly opposed.

"This bill significantly and fundamentally changes the Permanent Fund dividend program from a mandatory, formula-driven method of meeting our constitutional obligation to provide the maximum benefit of our resource wealth to all Alaskans, current and future, to one that will exist merely at the whim of future legislatures and governors," he wrote.

The new proposal did appear to satisfy Gov. Bill Walker, who two years ago began pushing the idea to use the Permanent Fund to fix the state's deficit. He endorsed Wednesday's version of SB 26 in a one-sentence, prepared statement, referring to it as a "CS," for "committee substitute."

"Because the CS for SB 26 addresses the most important item, protecting the fund's real value for the long-term, it is a responsible approach," the statement quoted him as saying.

Hoffman, the Bethel senator, said the legislation should also satisfy the trustees of the Permanent Fund, who have pushed lawmakers to adopt a "rules-based framework" to guide the way the state spends the fund's money. Such a framework, according to the fund's managers, would allow more efficient investment of the fund's assets and produce higher returns.

The fund's chief executive, Angela Rodell, was unavailable for comment Wednesday, a spokeswoman said.