Community Perspective

Existing PFD formula incompatible with recent funding law

Editor’s note: This column is the fifth in a continuing series by the author about the Alaska Permanent Fund dividend and the state’s fiscal system.

Discussion is increasing about changing the Alaska Permanent Fund dividend formula, which has not been used since 2015 but remains on the books. Driving this new talk is the state of Alaska’s transformation of its fiscal system in 2018 through the adoption of a percent of market value regime, also referred to as POMV.

The Legislature created the dividend formula in the 1980s, with the final change occurring in 1986. The dividend formula is based on the permanent fund’s earnings (or income). The statutes setting out the dividend formula provide that the pool of money from which dividends are paid consists of 50% of the “income available for distribution,” defined as 21% of the permanent fund’s net income for the last five fiscal years.

The Legislature adopted in 2018 a very different formula that constitutes a conceptual change to the state’s fiscal system. Before 2018, the only uses for the permanent fund’s earnings in significant amounts were to pay dividends and inflation-proof the permanent fund principal. The statutes bringing in POMV in 2018, on the other hand, established a new fiscal system in which for the first time the state of Alaska began the heavy use of permanent fund earnings to pay for conventional public services such as schools, roads, and Troopers in addition to paying for dividends.

Under the POMV system, the Alaska Permanent Fund Corp. determines annually the “amount available for appropriation,” defined as 5.25% of the permanent fund’s average market value for the first five of the preceding six fiscal years. (As of July 1, 2021, that 5.25% goes to 5%.)

The statutes creating POMV state that the Legislature may not appropriate from the permanent fund’s earnings an amount for public services that exceeds the “amount available for appropriation” in a fiscal year. The POMV statutes also provide — critically — that the 5.25% (and, later, 5%) is supposed to cover the permanent fund’s earnings’ contribution to the conventional budget plus pay for the dividend.

The dividend formula is based on earnings, while the POMV formula is based on value. The two formulas are philosophically different and inconsistent with each other.

To see the incompatibility, let’s look back. When the stock market takes a dive — such as in 2008 — earnings will take a hit. When the stock market recovers, earnings will be high. The dividend has gone up and down with these financial gyrations. That’s why the dividend was $845.76 in 2005, $2,069 in 2008, and $1,305 in 2009, and would have been $3,000 this year under the statutory dividend formula.

Wild swings like these, however, make it hard to run a government. If we are going to use the permanent fund’s earnings to fund a big part of state government — as POMV is designed to do —we need a predictable amount. The average market value of the permanent fund under POMV changes some each year, but those changes are not huge, leaving a relatively predictable amount to fund government annually.

The POMV formula does not tell you what the dividend amount will be, triggering yearly legislative battles. Absent new revenues from taxes — whether broad-based taxes or oil tax increases — the POMV system also creates competition between spending on dividends and spending on public services.

The adoption of POMV in 2018 represented a recognition that the state of Alaska had created a fiscal system in the early 1980s that no longer worked because it had relied on the state government getting a substantial amount of new oil money each year, which is no longer occurring. Along with the conflicts between the two formulas, talk of a new dividend formula stems from a recognition that it is mathematically impossible to use the dividend formula created in the 1980s without changes to the budget or the tax system or both that most Alaskans apparently do not support. That mathematical impossibility is the subject of the next installment in this series.

Cliff Groh is an Anchorage lawyer and writer as well as the legislative assistant who worked the most on the bill in 1982 that created the Alaska Permanent Fund dividend.

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