Sunday, October 23, 2016

Bill Walker's "Pants on Fire" claim about the PFD ...

If there were an Alaska state edition of the Pulitzer Prize-winning PolitiFact fact check blog, https://goo.gl/c04l, our guess is it would rate an ongoing claim being made by Gov. Bill Walker and others in this election cycle about the PFD as "pants on fire" false,  https://goo.gl/eURG.

Walker's claim is this: "If we do nothing, the [Permanent] fund's earnings reserve will likely be depleted within four years. Then dividends will be zero.https://goo.gl/gbe8aC

The first sentence is bad enough.  If Alaska government actually does absolutely nothing -- nothing -- in the intermediate future, doesn't for example:
  • Reduce spending to long term sustainable levels (the FY 2018 number is $4 billion, just $300 million lower than the level approved for FY 2017, https://goo.gl/bv5hJH),
  • Implement Governor Hammond's 50/50 vision for use of the earnings from the Permanent Fund ("I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity. … [Once the money wells were pumping,] [e]ach year one-half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.” -- Gov. Jay Hammond, Diapering the Devilhttps://goo.gl/FFTi9M), or
  • Correct the Permanent Fund "inflation proofing" mechanism that currently is double counting for inflation -- and as a result, depleting the Permanent Fund earnings reserve at the rate of roughly $1 billion/year, https://goo.gl/piLxXf,
  • And oil prices don't recover as most analysts now anticipate (the non-partisan Energy Information Administration's Annual Energy Outlook 2016 published in July of this yearhttps://goo.gl/bAqh55, for example, estimates Brent oil prices recovering to $84.59/bbl by 2020; the Governor is basing his projections on oil prices continuing to hover at $54.48 at that point, https://goo.gl/uDwqYk),
then it is possible the Permanent Fund earnings reserve might be depleted at some point.

Even then, the "four year" prediction is highly unlikely, which would earn the statement on its own a PolitiFact "Mostly False" ranking. https://goo.gl/uDwqYk ("MOSTLY FALSE – The statement contains an element of truth but ignores critical facts that would give a different impression.").

But the second sentence of the claim -- "Then dividends will be zero" -- is absolutely "pants on fire" false. ("PANTS ON FIRE – The statement is not accurate and makes a ridiculous claim,"  https://goo.gl/cFfHDU).

Why?  Because except in the most rare and unlikely case, PFD's are not paid out of the accumulated earnings reserve.  Instead, they are paid out of the annual revenue stream produced each year from investments made by the Permanent Fund Corporation.  That revenue stream is a renewable resource, it occurs each year.

Thus, as long as the Permanent Fund produces earnings each year adequate to cover the amount there will be enough to pay the full PFD; the level of the accumulated earnings reserve, which is the basis for Governor Walker's claim, is irrelevant -- it does not matter to the calculation.  Even if it is depleted, there will still be a flow of money to pay the PFD.

What is the projected ability of that earnings stream to cover the PFD?  Well, here is the non-partisan Permanent Fund Corporation's take on it from their most recent (July 31, 2016) "Financial History & Projections," https://goo.gl/UiBbKh (there is a lot of data on this sheet; we have highlighted the relevant portion):


In all, repeat all -- and one more time just in case you missed the point the first two times, repeat all -- of the forecast years through FY 2026 (well beyond Walker's four year claim), the "Statutory Net Income" from the Fund, which is the cash flow from which the PFD is paid, is more than sufficient to cover the full PFD.  Indeed, in almost every year the "coverage ratio" -- the amount of cash flow available to cover the PFD obligation -- is more than 2x (200%).  Even in the "worst" forecast year (FY 2018), the coverage ratio is still 1.87x (187%).

As a result, Walker's claim that depleting the earnings reserve will reduce the dividend to "zero" "is not accurate and makes a ridiculous claim," in other words it is "Pants On Fire" false.  

With that, so is the basis he claimed for cutting the PFD this year.  The cut wasn't needed to preserve the PFD.  The PFD is and would continue to be doing just fine as it is.

The same reasoning underlies why even Walker's claim that "the [Permanent] fund's earnings reserve will likely be depleted within four years" is mostly false.

In addition to funding the PFD, the annual earnings stream grows the accumulated earnings reserve.  The amount by which it does is not explicitly stated on the Permanent Fund Corporation's report, but can be derived from the numbers that are there.  From FY 2018-23 (the next four fiscal years), even if none of the bullet point steps listed above are taken, the accumulated earnings reserve is still projected by the non-partisan Permanent Fund Corporation to increase by roughly $2.1 billion.  Even if only the inflation proofing mechanism is fixed from the above bullet point list, the accumulated earnings reserve will still grow by $5.943 billion.

As a result, even if Walker is otherwise correct that "we do nothing," it is highly likely that the accumulated earnings reserve -- which has nothing to do with the ability to maintain the PFD -- will last longer than four years.  In short, using the PolitiFact scale, even that claim is "mostly false."

Walker was elected in 2014 claiming that he would be "open and transparent" about Alaska's fiscal situation.  Unfortunately, he is increasingly becoming anything but, and indeed, now is dropping down into the depths of "Pants On Fire" dishonesty, at the time Alaska -- and Alaskans -- need clarity and transparency most.