Thursday, October 13, 2016

Those who argue that state government is "running out of savings" are misleading Alaskans ...

Those who argue for cutting the PFD often assert as "fact" that, absent other action, state government will run out of savings in two years. https://goo.gl/xRg78f   But that is not a "fact;" instead it is a fiction used to make the state's situation seem much more dire than it is in an effort to stampede government and citizens into supporting a cut in the PFD.

Their argument is based entirely on the current status of the Constitutional Budget Reserve (CBR), one of the state's savings accounts.  According to the Legislature's Legislative Finance Division (LFD), the balance in the CBR was $6.3 billion as of July 1, 2016 and, based on the Administration's revenue and spending assumptions for FY 2017, will be $3.5 billion as of June 30, 2017, the end of FY 2017. https://goo.gl/u1No6p at 3.

Using, again, the Administration's revenue and spending projections, those that make the argument then assume that most or all of the remainder will be drained during the subsequent fiscal year, FY 2018.

The fallacy of the argument is that the CBR is the state's only savings account; it's not.

Those looking again at the same LFD report, https://goo.gl/u1No6p at 3, will see a line under the heading "Undesignated Reserves" for the "Permanent Fund Earnings Reserve Account," (ERA) which grows nearly $2 billion over the year from $7.3 billion (July 1, 2016) to $9.2 billion (June 30, 2017).

Understanding that account is critical.  Some argue that the account is the source of funds for the PFD and it is that. But it also is much more than that, which those arguing to cut the PFD quickly overlook because it gets in the way of their narrative.

The account is a creature of AS 37.13.145, https://goo.gl/rfScqh.

To understand that statute requires first understanding Governor Hammond's objective when establishing the Permanent Fund and later, the PFD.  Here is what he said in Diapering the Devil,  https://goo.gl/FFTi9M.
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.
The statute implements that vision in this way.  Now that the "money wells" (the Permanent Fund) are pumping, the earnings derived from the Permanent Fund go to the earnings reserve account.

From there a portion (one-half measured as provided by the statute) is then distributed to the dividend fund to be "dispersed among Alaska residents" and a portion is sent back into the Fund to cover inflation.

The remainder -- "the other half of the earnings [which] could be used for essential government services" -- remains in the ERA.  So, after the PFD is distributed each year, what remains in the ERA is the accumulated portion that Governor Hammond envisioned being available for "essential government services."  The fact that it has been accumulated rather than previously spent doesn't change its purpose; it still was meant, and remains available to be used, "for essential government services." It is, in essence, a second source of savings for that purpose.

Once understanding that the PFD debate changes significantly.

Instead of "only two years remaining" in savings, the amount in savings immediately grows to more than $12 billion, enough to withstand at least four more years of deficits, even on the surface.

But looking past the surface it is even more than that.  As Governor Hammond envisioned, once the money wells started pumping they have continued to produce earnings.  The same earnings that continually replenish and fund the "one-half of the account’s earnings ... dispersed among Alaska residents," also continue to replenish the "other half of the earnings" -- those available to "be used for essential government services."

So, unlike the CBR -- which is a static number capable of being drawn down -- the earnings reserve is continually being filled with new earnings, making it capable of sustaining continued draws (if limited to the "other half of the earnings") for a long time to come.

As we have argued on these pages since 2010 Alaska is desperately in need of fiscal reform, but it is not facing a dire, immediate emergency which justifies cutting the PFD, which according to the University of Alaska-Anchorage's Institute of Social and Economic Research has the "largest adverse impact on the economy" of any of the state's fiscal options. https://goo.gl/XVdw3Q

Those that claim otherwise -- those that claim that Alaska only has "two years" of savings remaining -- are engaged in fear mongering of the worst kind at the very time Alaska -- and Alaskans -- need to hear the truth.  They are misleading Alaskans.