Does it make any sense to spend $6 billion from Permanent Fund? No.
Gov.-elect Mike Dunleavy wants to spend $6 billion from the Permanent Fund in the next fiscal year, which would include a giant dividend and about $1.5 billion to help pay for state and local government services.
Dunleavy keeps saying that the Permanent Fund earnings reserve account that would be the source of this money contains $19 billion, so we can afford to give out a $6,700 dividend next year.
The $6 billion would include $2.4 billion to reverse the dividend reductions approved by Gov. Bill Walker and the Legislature in 2016-2018, as well as $2 billion for the 2019 dividend and about $1.5 billion to pay for government operations.
"We have $19 billion in the ERA," Dunleavy told KTUU in Anchorage this week.
He speaks about this in the present tense when he should be using the future conditional.
The earnings reserve account is where all the money earned by Permanent Fund investments accumulates and it can be spent with a majority vote of the Legislature. The principal of the fund cannot be spent.
The available balance in the earnings reserve that has not been obligated was $17 billion as of Sept. 30, according to the Alaska Permanent Fund Corp.
We don’t know how much it will contain in July when the next fiscal year begins. In September, the corporation estimated that it could be anywhere from $16.3 billion on the low side to $21.2 billion on the high end.
The corporation gave $19 billion as the middle-ground estimate for the balance next summer. Readers who have challenged my assertion that Dunleavy keeps making a $2 billion mistake claim that Dunleavy is right because the fund might contain $19 billion next July. Maybe yes. Maybe no.
We’ll have an updated earnings estimate shortly from permanent fund managers about how the fund has fared during the recent market decline and what lies ahead. There is uncertainty about the future.
Look at oil prices, which have dropped by about $20 a barrel in little more than a month, a plunge the experts didn’t see coming. It may have been an attempt by the Trump administration to trick the Saudis into keeping production up in advance of sanctions against Iran.
As things settle out, the big lesson for Alaska once more is that we have as much control over the price of oil as we have over the weather.
Deciding whether the state can afford to take $6 billion from the permanent fund will be a major decision for the next Legislature. But it shouldn’t be a difficult one because the withdrawal should be about half that amount.
The long-term earning power of that $3 billion in excess withdrawals is essential not only to pay future dividends but to help provide income to run state and local government services.
Roger Marks, a former state economist, says that the plan approved by the Legislature and governor to limit withdrawals from the permanent fund to 5.25 percent of its market value does not leave billions in excess cash to spend.
Marks said that under this plan “every dollar of future earnings is essentially spoke for and the budget is not balanced.”
He said that absent drastic budget cuts or new broad-based taxes, drawing the earnings reserves down in a single year by 25 percent is reckless. I think he’s right.
“Between 2014 and 2018 the budget reserve accounts were depleted from $18 billion to under $2 billion now,” said Marks. “They are no longer capable of being the swing source of cash during periods of low revenue, especially now with oil prices marching down toward $60 again. Instead, that role has now been placed on the earnings reserve.”
He also contends that an additional $1 billion or so should be placed into the principal of the fund each year to offset inflation, another reason to be conservative with the earnings reserve.
We don’t know if oil prices will be $50 per barrel or $80 per barrel in the months and years ahead. That uncertainty is reason enough to justifying cutting the $6 billion withdrawal to $3 billion.