Dividend dispute presents an elephant-sized dilemma for Alaska lawmakers in special session

JUNEAU — As they begin their first special session of 2019, Alaska lawmakers seem to have solved their crime legislation logjam. Now, they will turn their attention to the Permanent Fund dividend, but a quick solution isn’t likely.

Complicating matters, Gov. Mike Dunleavy has tied a decision on the dividend to the state operating budget. Without agreement on a dividend, lawmakers cannot finish the state’s operating budget and capital budget. The state is on track for a government shutdown on July 1.

“The big issue is going to be the Permanent Fund Dividend. That’s going to be the elephant in the room,” Speaker of the House Bryce Edgmon, I-Dillingham, said Friday.

“That is the elephant in the room that’s stepping on all of us,” said Senate President Cathy Giessel, R-Anchorage.

July 1 is the start of the state’s fiscal year and the effective deadline for negotiations. Alaskans will start to see the effects sooner than that; state employees will receive layoff warnings June 1, as part of union contracts that require one month advance notice.

Lawmakers have clashed over the dividend before, but this year’s impasse may be the worst yet because it’s being caused by three separate but related questions:

• How much should the dividend be this year?

• Should the payout formula be changed?

• Should the dividend be constitutionally guaranteed?

“Those are the three big ones,” said Sen. Mike Shower, R-Wasilla and a member of the Senate Finance Committee.

“They’re all linked in some capacity, but they’re all so different,” said House Minority Leader Lance Pruitt, R-Anchorage, of the three questions.

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Gov. Mike Dunleavy has indicated he will veto any state budget that does not include a dividend paid according to the traditional formula in state law. That would be $3,077, if the same number of people are eligible for a dividend this year as last year.

Not every lawmaker is in step with the governor, saying that following the traditional formula would require unsustainable spending from the Alaska Permanent Fund. Others agree that a traditional dividend should be paid this year, but only if the dividend formula changes before the 2020 dividend. Still others believe the dividend formula should not be changed at all, and that all other state spending should be cut in order to pay that traditional dividend.

“There’s different combinations of those three (questions), which is part of the problem,” said Sen. Shelley Hughes, R-Palmer.

First dilemma: This year’s dividend

This debate is as much philosophical as mathematical: Is the dividend an obligation of the state, or is it another budget line item, as subject to cuts as anything else?

The governor and many lawmakers have sided with the former argument, saying it is a natural outgrowth of Article VIII of the state constitution, which requires natural resources to be managed in the public trust. The dividend, as that argument goes, is the individual Alaskan’s share of those resources, and it is backed by state law.

“I would say that it is part of our fabric as a state. It is part of our history, almost 40 years. It’s not a small matter to Alaskans,” Hughes said.

“Well, where do you expect that money to come from?” asked Sen. Chris Birch, R-Anchorage, in a recent interview.

In February, Dunleavy proposed a state budget with enough cuts and revenue transfers to pay a dividend under the traditional formula without overspending from savings.

Lawmakers subsequently discovered that some of Dunleavy’s proposed cuts — particularly to health care — were impossible to make in a single year. Other cuts required additional legislation or would have resulted in significant boosts to local property taxes.

The latest draft of the state budget includes a bit more than $200 million in cuts. That leaves about $700 million available for the dividend. A traditional dividend needs $1.2 billion more.

Birch says it’s unacceptable to follow the traditional formula under those circumstances.

“I don’t think it’s really reasonable to sit there and hang your hat on that,” he said.

He pointed to a 2017 ruling from the Alaska Supreme Court that found the dividend is a budget line item, not a guaranteed transfer.

Line item or not, Shower said, the dividend formula is still in state law and should be followed.

“For me, it’s very simple: The law says $3,000, that’s the statute, that’s what people expect,” Shower said. “It’s a non-negotiable item to me this year.”

Even if lawmakers have to overspend the Permanent Fund, he points out, the earnings reserve — the spendable portion of the fund — has $19 billion in it, more than enough to cover what’s needed.

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Birch doesn’t think it’s appropriate to violate Permanent Fund spending limits approved by lawmakers last year.

“That’s frankly, the large difference we have in this building," he said.

Sen. Peter Micciche, R-Soldotna, pointed out that regardless of lawmakers’ differences, the governor has vowed to veto any budget without a traditional dividend, which means the Legislature would have to muster 45 votes in opposition to override any veto. Given how divided lawmakers are, that’s not likely to happen.

“Whether or not they realize it, whether they pay it today, or they pay it on June 30, they’re paying a full dividend,” Micciche said.

Second dilemma: Changing the formula

If no changes are likely this year, what about next year?

Dunleavy’s budget proposal was strongly opposed by many Alaskans after it was released in February, causing lawmakers to back away from most of the cuts he proposed.

If lawmakers remain unwilling to cut state services and unwilling to cut the dividend, they will be forced to turn to the Permanent Fund to make up the difference. Lawmakers last year passed a law limiting their ability to spend from the Permanent Fund, and under a no-cut scenario, they would have to break that law. Over several years, projections indicate, that spending would reduce the value of the Permanent Fund.

In the Senate, that idea is unpalatable enough that lawmakers have introduced legislation to change the traditional formula.

“Citizens hear that and that alarms them, but what they also should be aware of is that it’s not something that we can continue to do. The numbers don’t work,” Giessel said.

In the Senate, the leading proposal is to take the annual transfer from the Permanent Fund to the treasury and split it 50-50, half for dividends and half for general government services. The 50-50 concept is in Senate Bill 103, which is not on the special session agenda. (The governor could amend his that agenda at a later date.)

If the traditional dividend is about $3,000 per person, this new formula would result in a dividend of about $2,300 per person. At current levels of spending, there would still be a deficit: $861 million instead of $1.2 billion, according to figures from the office of Sen. Natasha von Imhof, R-Anchorage.

The 50-50 plan has its opponents as well as its supporters. Rep. Chris Tuck, D-Anchorage, said Friday that he views dividend cuts as a tax on poorer Alaskans.

“Simply cutting the Permanent Fund dividend is an unfair tax to my four-year-old daughter, my fixed-income, senior mother, who is paying the same amount as my multimillionaire friend,” he said.

Sen. Bill Wielechowski, D-Anchorage, has argued that a preferable alternative would be to instead change the state’s oil tax structure, generating additional revenue for the dividend.

Other options include a statewide income tax or sales tax, but those have received a mixed reception.

“At this point, we don’t see that people want a tax either," Senate President Giessel said. “There’s only so much money, and we’re trying to figure out how to best share the wealth with citizens. It is something that has been a legacy of the state, and we don’t want it to be something that cripples the state and our ability to provide services.”

Third dilemma: Alaska’s constitution

Tuck, Hughes, Shower and other lawmakers said there’s another problem with rewriting the Permanent Fund dividend formula: A lack of trust among Alaskans.

“They’re afraid that once government starts spending it, there’s no end, and it will disappear,” Tuck said.

In order to forestall that problem, some legislators (and the governor) support constitutional protections for the dividend. A constitutional amendment for a dividend would also answer the governor’s oft-stated request that any changes to the dividend formula be first approved by voters.

Not every lawmaker thinks a constitutionally guaranteed dividend is a good idea.

Sen. John Coghill, R-North Pole, is one of those lawmakers. While he believes the formula should be changed, he believes those changes should be in statute. The moment someone talks about a constitutional change, “You just lose me,” he said.

From his perspective, the dividend should not be on the same level as the constitutional guarantees of free speech, expression and religion. Budget-wise, constitutionalizing the dividend puts it at the same level as education funding, which is constitutionally required.

If oil prices were to plunge or investments falter, the state would be required to pay a dividend, even if it lacked the money. He worries that in those cases, attorneys and judges would be making the call, rather than lawmakers and voters.

Hughes agrees with Coghill that the PFD shouldn’t be a fundamental right, but the Legislature’s actions over the past few years have shown that lawmakers are willing to break the dividend law.

“A 50/50 discussion, I think, is worth having, but I think changing statute alone is a bad idea and will not solve the problem,” Hughes said. “I think that any bill that would change with the statute must be paired or coupled with a constitutional amendment to settle the matter.”

If not, she said, the dividend would stay a perennial argument, and special sessions like this one could become common.

“I think it would be a repeated battle every year until kingdom come,” she said.

“I think you’d be back at the same problem,” Hughes said. “The debate about how much ... would continue to be the battle every year.”

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