With the attorney general's logic, about $10 billion or more could be removed from Permanent Fund

Attorney General Kevin Clarkson and Gov. Mike Dunleavy should be careful about what they wish for.

Clarkson, Dunleavy and temporary budget director Donna Arduin are all in on emptying the Power Cost Equalization (PCE) fund of $1.1 billion and stashing the money in the Constitutional Budget Reserve, where it will no longer be designated to subsidize rural electric rates.

They argue that the Constitution and the state law governing the fund require this to happen. Without the so-called “reverse sweep,” blocked by Dunleavy allies in the state House, the transfer is a must, they say.

If the Power Cost Equalization fight ends up in court, of which there is a chance, and if Clarkson is right, of which there is a chance, there is also a chance that about $10 billion or more of the Permanent Fund earnings reserve should be transferred into the Constitutional Budget Reserve.

There is more than a chance that this would raise the level of dysfunction in state government, already at a record high. The best chance to avoid this mess is for the House Republicans, led by Rep. Lance Pruitt, the husband of Dunleavy’s communications expert, to sweep this off the table.

Here are a few things to consider.

The Alaska Permanent Fund consists of the principal of the fund and the earnings reserve account, which will contain about $12 billion to $14 billion following a recent $4 billion transfer to the principal.

The Clarkson legal argument about the PCE is that the $1.1 billion cannot be spent by the Alaska Energy Authority, the corporation where the money is parked, without an appropriation by the Legislature.

He says that means the PCE meets the legal requirement that without the so-called reverse sweep, all the money in the PCE should be transferred to the Constitutional Budget Reserve effective June 30. (The transfer won’t actually take place until late August or early September. It won’t take place at all if the House minority Republicans get their act together.)

The money in the earnings reserve of the Permanent Fund has a status that is comparable to that of the PCE. It cannot be spent by the Permanent Fund corporation without an appropriation by the Legislature.

There is a disagreement in Juneau among lawyers and accountants and other experts about whether the earnings reserve is subject to the sweep rule.

The Legislative Finance Division has looked at it and concluded that if the Clarkson logic on the PCE holds, it would apply to the earnings reserve of the Permanent Fund.

It’s impossible to predict what the courts would do, but it’s easy to imagine a situation in which about $10 billion from the earnings reserve account would have to be moved to the Constitutional Budget Reserve, which would leave little in the earnings reserve.

The Constitutional Budget Reserve was set up so that any money withdrawn from it is technically treated as a loan. The earnings reserve transfer would be capped at what the state has “borrowed” from the CBR, about $10 billion-$12 billion.

The long-term solution is to amend the Constitution to create more reasonable rules on state savings, but a short-term fix would be a step toward reducing dysfunction.

By the way, and this is really going into the weeds, there is a disagreement about what the total CBR number should be, a dispute that stems from a decision by the Walker administration about what qualifies for the CBR and what qualifies for the general fund.

One audit says the amount it should contain “is materially misstated by $1.46 billion and management declined to correct the misstatement.”

The attorney general’s office concluded that “taxes, royalties, and interest received as a result of decisions by the Federal Energy Regulatory Commission are not required to be deposited in the Constitutional Budget Reserve Fund. Historically the receipts have been deposited in the Constitutional Budget Reserve Fund.”

Kris Curtis, legislative auditor, wrote this in February: “The attorney general further asserted that similar monies received in prior years that were deposited in the Constitutional Budget Reserve Fund should be reclassified as General Fund monies thereby reducing the amount that the General Fund must repay the Constitutional Budget Reserve Fund in the future. Legal analysis does not support the attorney general’s position. The failure to properly deposit monies received during the fiscal year ended June 30, 2018 and the reclassification of prior year monies violates state law and provides misleading information to users of the financial statements.”

Dermot Cole1 Comment