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Alaska: Debating the Dividend
The state legislature is being called into a fourth special session; so what's going on?
Since 2014, the State of Alaska’s finances have been disrupted by a global rout in oil prices. Things started to improve the last couple years, but work was still needed for long-term stability … then COVID-19 came causing further disruption.
Alaska is unique among all other states in that it does not levy a broad based sales or income tax. The state also relies on a wealth fund to pay an annual dividend to residents.1 However, as budgetary reserves dwindled the state reduced its annual dividend, retaining the earnings, and using the fund for operational expenses.
The question of paying a full dividend, reducing expenses, or raising new revenues to find some semblance of fiscal stability has been stuck in political paralysis.
A budget proposal earlier this year called for a roughly $1,100 dividend, but failed to win support in legislature. That left the dividend at an estimated $525. The Governor vetoed that, favoring a check around $2,350. Recently, the legislature and Governor agreed on the $1,100 dividend, but the Governor considers that a “partial” dividend for the year … now the legislature is being called back for another special session.
What is the Permanent Fund and its Earnings Reserve Account (ERA)?
The Permanent Fund is the constitutionally protected principal account, or corpus, that has been built up over decades.
The ERA is investment earnings from the Permanent Fund and is available for use by the state legislature; typically to pay the state’s annual dividend to residents, transfer money back to the corpus for inflation proofing, and fund state operations.
What’s the Issue?
The state has been running operating deficits since 2014, only achieving balance using its two budgetary reserves that have been severely depleted.
The state has also reduced the annual dividend to residents, either through the Governor’s veto power or legislative agreement, to retain earnings in the ERA.
In 2018, the state agreed on a structured draw from the ERA based on a percent of market value (POMV) calculation of the Permanent Fund’s principal balance.
Potential Budget Cuts Placed Spending Per Capita at a 45 Year Low
The Philosophical Question: What to do With the Dividend?
Prior Administration’s 10-yer Financial Plan (AK OMB, 2017)
Shaking Alaska’s Oil Dependence
Huge Arctic oil find makes waves E&E News
CHART OF THE WEEK
Findings of the Study:
The state’s revenues, inclusive of using the ERA fund draw, is $2,920 per capita in fiscal 2021. The historical average between 1975 and 2021 stands at $3,659.
Average real per capita agency operations between 1975 and 2021 is $6,158. In fiscal 2021, real agency operations per capita spending is expected to be $4,971 which will be the 6th lowest since 1975.
Average per capita capital spending in nominal terms between 1975 and 2021 is $696.9. Adjusted for inflation, fiscal year 2021 per capita capita spending will be the third lowest since 1975.
Why this Matters:
The spending and revenue patterns show how the boom and bust cycles of the energy sector affect state spending. In the past, the state has been able to rely on reserves. However, those reserves have been nearly exhausted since the 2014 energy rout.
In the current policy debate the state is grappling with paying its dividend to residents or restoring funding of state services; practical and philosophical questions.
The state recognized a way to use its permanent fund earnings for operations in 2018, but has not settled on how much of a dividend to pay residents. Until the question is settled, the state’s fiscal future is in a state of paralysis.
The Issue: Alaska demonstrates that when you start giving people money, that policy may eclipse every other political concern and missions of government.
“The situation unfolding in Alaska demonstrates how economic precarity, paired with an entrenched reliance on an annual check, can result in deep political dysfunction.”
The Issue: An innovative approach to economic recovery could present an opportunity to reduce inequality.
“As taxpayers, we bear the downside risk. If the businesses don’t pay back, we bear the losses. If that is so, we all must also benefit from the potential upside when companies are profitable again. A sovereign wealth fund that holds those equity shares in a trust for all citizens would end up owning significant parts of the economy.” - Joseph Stiglitz
The state’s wealth fund is known as the Permanent Fund, a constitutionally protected fund that cannot be used for any purpose. At the end of July 2021, the fund had about $66 billion in assets. Earnings off those assets are deposited into the Earnings Reserve Account (ERA). The ERA is available for use by the legislature to pay the dividend, fund the state’s budget, or transfer back to the Permanent Fund’s corpus.
Guettabi, Mouhcine. "On the Alaska budget: A historical comparison," University of Alaska Anchorage, Institute of Social and Economic Research, Jan 2020 <https://iseralaska.org/2020/01/on-the-alaska-budget-a-historical-comparison/>
Any opinions expressed herein are those of the author and the author alone.