Gov. Mike Dunleavy has proposed a Permanent Fund dividend using the traditional formula. Could that formula change?

JUNEAU — Alaska Gov. Mike Dunleavy has pledged to pay a Permanent Fund dividend using the traditional formula in state law. On Wednesday, members of the Senate Finance Committee began debating whether or not the Alaska Legislature should change that formula.

Sen. Natasha von Imhof, R-Anchorage and co-chairwoman of the committee, said changes in the way that the Alaska Legislature handles spending from the Permanent Fund require a change in the dividend formula too. No legislation has yet been proposed to change the dividend formula, but von Imhof and other lawmakers said it’s important to begin discussions.

Already, lawmakers are preparing to ignore the traditional formula in favor of a dividend by fiat, just as they did last year. There is not enough legislative support for budget cuts large enough to pay a dividend using that formula.

If the issue isn’t resolved, the dividend and any failure to abide by the formula will be a perennial issue for lawmakers during session and for voters on Election Day, she and others said.

“It has become a focal point and is affecting campaigns and distracting legislators from other important work. So the question is, how do we make sure as we move forward, that we have enough money to pay both the dividend and all the necessary government functions?” von Imhof said.

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Last year, lawmakers approved Senate Bill 26, which was intended to limit the ability of the Legislature to spend from the portion of the Permanent Fund known as the earnings reserve. That account contains the fund’s investment earnings and is considered part of the fund’s $65.2 billion value.

While the Alaska Constitution prevents spending from the fund’s principal without approval of voters, the Legislature can spend from the earnings reserve with a simple majority.

SB 26 says withdrawals should be limited to 5.25 percent of a rolling average of the fund’s value. After 2021, the withdrawal limit falls to 5 percent.

What SB 26 doesn’t say is how much of that withdrawal should be spent on dividends and how much should be spent on general government expenses. Lawmakers tried for three years to determine that division, what’s colloquially known as the “split,” before passing SB 26 without it.

Without the split, lawmakers can either determine the dividend by fiat (which happened last year) or by following the traditional formula (an approach the governor and some lawmakers prefer).

If the traditional formula remains in use, von Imhof explained, the dividend could grow to consume all of the Permanent Fund transfer under certain financial circumstances. That could require budget cuts even larger than those proposed by the governor this year, or put pressure on the Legislature to violate the SB 26 rules. Under other circumstances, as was nearly the case during the Great Recession, the earnings reserve might lack enough money to pay a formulaic dividend — or even a dividend at all.

“If our goal is to stop haggling over the dividend for the next 40 years as well as protect the Permanent Fund for the long term … we should start thinking about the split,” von Imhof said.

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If lawmakers discard the traditional formula in favor of the split, they’ll open a box containing many boxes of worms. What should the split be? Should it be in statute — allowing the Legislature to adjust it in the event of problems — or should it be in the state constitution, providing security from changes?

Right now, there’s no legislation in any direction.

“That has not been done yet. I think the Legislature should follow the statute,” said Sen. Bill Wielechowski, D-Anchorage.

Sen. Bert Stedman, R-Sitka and chairman of the Senate Finance Committee, suggested a “multi-year step approach could be warranted.”

Under one such possibility, the Legislature could put a split in state law, test it, then go to voters with a constitutional change incorporating a successful split.

Sen. Lyman Hoffman, D-Bethel, warned against that approach.

“I say that it would be a great mistake if we make a statute change that can be ignored just like the 90-day session that this Legislature and governors before,” he said, referring to a 2006 ballot measure that calls for the Legislature to limit its sessions to 90 days.

Sen. Mike Shower, R-Wasilla, said he agrees that the Legislature should take the issue of the dividend off the annual table.

“We should be arguing about where we spend our money, not how much we have,” he said.