Senate Passes Bill to Cap Permanent Fund Dividend at $1,000
By MARY KAUFFMAN
June 09, 2016
Senate Bill SB128, passed with a vote of 14 to 5 with Senator Huggins excused. Voting in favor of capping the Permanent Fund were Senators Lyman Hoffman (D-Bethel), Pete Kelly (R-Fairbanks), Anna MacKinnon (R-Anchorage), Lesil McGuire (R-Anchorage), Peter Micciche (R-Soldotna), Donny Olson (D-Nome), Bert Stedman (R-Sitka ,Ketchikan), Gary Stevens (R-Kodiak), Click Bishop (R-Fairbanks), John Coghill (R-North Pole), Mia Costello (R-Anchorage), Dennis Egan (D-Juneau), Cathy Giesse (R-Anchorage)l, Kevin Meyer (R-Anchorage). Voting against were Senators Bill Stoltze (R-Chugiak) , Bill Wielechowski (D-Anchorage), Mike Dunleavy (R-Wasilla), Johnny Ellis (D-Anchorage), Berta Gardner (D-Anchorage).
Responding to the vote, Governor Bill Walker said in a prepared statement, “I thank members of the Senate for taking this important vote to put Alaska on the path for a sustainable future. We recognize the concern some have raised about the need for balance, which we have addressed through the remaining pieces of the New Sustainable Alaska Plan. Restructuring the Permanent Fund is the cornerstone of this plan, and a significant portion of it, but make no mistake—the work to put Alaska on a sustainable path is far from over. I applaud the Senate for taking this bold step.”
In a prepared statement, Sen. Anna MacKinnon (R-Eagle River) said, "the Senate took the bold step to address our fiscal challenge. Our economy is faltering and the credit agencies are watching. This is one piece of a plan we have worked all year to accomplish. We made significant cuts and major reforms."
MacKinnon said, " SB 128 preserves Alaskans’ dividend while providing a sustainable revenue stream to fund those services Alaskans count on every day. This was an historic vote – one I was compelled to take – for Alaska’s future."
Sen. Lesil McGuire (R-Anchorage) also released a prepared statement. McGuire said, "A book on Alaska history would begin each chapter with one certain thing: the price per barrel of oil on average that year, multiplied by its volume. That equation has been the nucleus of our history. This bill stabilizes our budget by restructuring the permanent fund distribution to retain a meaningful dividend for every Alaskan, alongside revenue contributions to the general fund."
McGuire said, "This bill is a billion dollar solution to a billion dollar problem. It is the one step among all the options that have been proposed to our budget crisis that we cannot reject. The Senate is so proud to be a part of this meaningful step toward helping Alaskans control and define our own destiny. The permanent fund was created to share intergenerational opportunity and wealth, and this is the final moment to act."
Alaska House Finance has scheduled a hearing & teleconference for Tuesday, June 14, 2016 to address HB 245, the House version of SB 128.
The Alaska Permanent Fund
In 1976, as the Alaska pipeline construction neared completion, Alaska voters approved a constitutional amendment by a margin of 75,588 to 38,518 establishing this dedicated fund: the Alaska Permanent Fund. Since the creation of the fund in 1976, the fund and the general health of the overall American economy have generated large earnings according to the Permanent Fund Dividend Corporation's website. In February 1977 the Permanent Fund received its first deposit of dedicated oil revenues totaling $734,000 and today the Fund's worth is an estimated 54 billion.
At first the Fund was invested entirely in bonds. In 1980, the Alaska Legislature created the Alaska Permanent Fund Corporation, to manage the investments of the Permanent Fund, and placed a list of allowed investments into state law. $900 million in surplus oil revenues was deposited in the Permanent Fund by special appropriation. And in 1980, the Legislature also approved the first Permanent Fund Dividend program which was ruled unconstitutional by the United States Supreme Court because individual dividend payments varied based on length of residency.
The Fund dividend program was established in 1982 by the Alaska legislature. It is possibly the viewpoint of many Alaskans who receive an annual dividend that the program has been a success. Of the spending that has occurred from the Fund, most of it has been for dividends to qualified Alaska residents. The Permanent Fund Dividend Division (a separate entity from the APFC) operates the PFD program, which the Legislature established in 1980.
The Alaska Legislature, at the request of the Board of Trustees, enacted inflation proofing in 1982 to protect the Fund’s purchasing power. The first Permanent Fund dividend check of $1,000 was also distributed in 1982. The Legislature paid the first dividend, not with Permanent Fund income, but with surplus oil revenues.
By 1993, Permanent Fund assets reached $15 billion and for the first time ever, Fund earnings exceed state oil revenues as the Fund reached the $25 billion mark.
In 1999. the Alaska Legislature increased the Fund's investment flexibility to allow up to 5% of the Fund's value to be invested in alternative investments.
In 2001, the Board of Trustees formally endorsed a constitutional amendment to change Permanent Fund payouts to a percent of the Fund’s total value (POMV). The first of a series of resolutions that would place this proposed change on a general election ballot was introduced in the Legislature at the Board’s request.
The Bear market that began in 2000 led to the Fund’s first negative return in 2002 with the negative market conditions carrying through 2003.
In 2005 the Alaska Legislature made a significant change in how Permanent Fund investments are determined by removing the allowed investment list from state law. From 2005 on Trustees make investment decisions solely under the guidelines of the prudent investor rule. Fund assets reach $30 billion. And in 2006, the Fund reached $35 billion in value, an increase of $5 billion from 2005.
A market correction began late in 2008 causing markets to drop dramatically, and made 2008 one of the five worst years in the 218-year history of the U.S. stock market.
On June 30 of each year, the Legislature appropriates funds from the account for dividends, inflation proofing and for whatever other lawful purpose the Legislature may designate. All income in the earnings reserve is available for appropriation.
Each year, the dividend distribution is calculated using a formula set in state law. The formula is based on an average of the Fund’s income over five years in order to produce a more stable flow of dividend amounts from year to year. Annual dividends paid out to Alaska residents over the years have ranged from a low of $331.29 in 1984 to a high of $2,072.00 in 2015.
Quoting the Alaska Humanities Forum, there is great controversy in Alaska over the proper use of the earnings of the Alaska Permanent Fund. Should the primary use be for the annual dividend program? Should any of the earnings be used to pay for state government? This question might not be as important except for the fact that over the last few years the Alaska state budget has not been in balance. The cost of state services has been greater than the amount of money state legislators have made available in the state budget. The earnings of the Permanent Fund could be used to balance the state budget if the legislature could use those earnings to pay for state services. But many legislators believe voters have said that they do not want the Permanent Fund earnings used in this way.
There is another fund which the legislature has taken money from for the last few years to balance the budget: the Constitutional Budget Reserve. This is a special fund created by constitutional amendment in 1990. These funds came from an 18-year tax suit with the oil industry that started with the oil flow in the trans-Alaska pipeline. State law had declared that one-eighth of the oil and gas from its lands belongs to the state, as a royalty.
In 1989 the state filed claims against 15 oil companies. One company, Amerada Hess, settled with the state for $319 million. Alaska voters created the Constitutional Budget Reserve to receive that award, and expected future awards from the case. In 1995 the other companies settled, just as the case was finally to go to trial.
Alaskans have recently become aware that in time, the Constitutional Budget Reserve will probably run out making the question of whether to use earnings of the Permanent Fund to balance the budget becoming extremely important.
The Alaska economy has a very narrow base. Oil production and federal spending make up two-thirds of that base. All other economic activity comprises the remaining third.
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