The fallacy of Alaska State Rep. Dan Ortiz (and others) ...

A recent Facebook post by Rep. Dan Ortiz attempting to explain his vote for cutting the PFD from the $2,700 provided by statute to a relatively arbitrary $1,600 provides a good opportunity to analyze the claim made by him and others (Sen. Mia Costello comes immediately to mind) that "you have to cut the PFD to save it."

Rep. Ortiz's full post is here. The crux of his argument is this:

The size of draw required to pay a full $2,700 dividend would require an additional [over the $1,600 passed by the House] $1 billion draw on the Earnings Reserve. The Commissioner of Revenue, the Director of the Permanent Fund Corp., and the Legislative Finance Director all ... have recommended a sustainable draw on the earnings reserve of 4.75% to 5.25%. The added draw from the Earnings Reserve to pay out the $2,700 would require a 6.7% draw on the market value of the fund.

Let's start with his last claim -- that "[t]he added draw from the Earnings Reserve to pay out the $2,700 would require a 6.7% draw on the market value of the fund."

Assuming -- as from his numbers seems to be the case -- that he is using the Permanent Fund's current $65 billion market value as the basis for his calculations, the draw required to pay out a PFD of $2,700 would only require a roughly 2.5% draw from the Permanent Fund, not the "6.7%" claimed by Rep. Ortiz. 

So where is Rep. Ortiz getting his numbers from, then? 

His numbers take as a given that the draw made from the Permanent Fund earnings goes first to fund state government at a specified level, and then treats the PFD as an incremental draw on top of that.

The House budget appropriates roughly $3.1 billion from the Permanent Fund earnings reserve.  That represents a 5.25% draw based on an average market value of roughly $59 billion (or a 4.75% draw on the current $65 billion market value Rep. Ortiz appears to be using). 

Of that, the House budget then rakes off the top two-thirds of that, or roughly $2.1 billion, for government. Rep. Ortiz treats that as a given.

His numbers then analyze the draws to fund the PFD as incremental to that. Adding the draw required to fund a $1600 PFD results in an overall draw of 5.25% (using an average Permanent Fund market value of roughly $59 billion). Adding the "additional $1 billion" which Rep. Ortiz claims would be required to fund a $2,700 PFD results in his claimed overall "6.7% draw on the market value of the fund."

There are several glaring problems, however, with Rep. Ortiz's analysis.

The most fundamental is that it not only ignores, but subverts, the current state statutes by treating the PFD as an incremental, rather than the base, draw.

The statutes could not be any more clear on this point. AS 37.13.145, the statute that governs "Disposition of Income" from the Permanent Fund, provides in relevant part as follows:

(b) At the end of each fiscal year, the corporation shall transfer from the earnings reserve account to the dividend fund established under AS 43.23.045, 50 percent of the income available for distribution under AS 37.13.140. 

(c) After the transfer under (b) of this section, the corporation shall transfer from the earnings reserve account to the principal of the fund an amount sufficient to offset the effect of inflation on principal of the fund during that fiscal year. 

Only once those two transfers occur is there any scope under the current statutes for a draw for government.

Rep. Ortiz not only entirely ignores that prioritization, his approach in fact reverses (i.e., subverts) it, taking the draw for government first and treating the draw for the PFD as what comes last.

If Rep. Ortiz followed the statutes in his analysis the blame for the excessive draw would fall directly on the government overdrawing its share of the Permanent Fund earnings, not on the PFD. But in order to justify his conclusion, he applies the statute exactly backwards.

Rep. Ortiz's failure to follow the statutes is at best disingenuous and, more fairly put, results in an outright false conclusion.

But that's not the only fallacy in his piece.  

Rep. Ortiz also attempts to justify his position by claiming that "[t]he size of draw required to pay a full $2,700 dividend would require an additional [over the $1,600 passed by the House] $1 billion draw on the Earnings Reserve."

It wouldn't. The House's calculation of a $1600 draw appears to be based on the assumption of roughly 615,000 recipients, the same number as last year. Adding an additional $1100 to bring the total to the statutory $2700 would only require an additional $675 million, not the "additional $1 billion" claimed by Rep. Ortiz.

Overstating the amount by nearly 50% is more than a mathematical mistake, it's an intentional scare tactic designed to prop up his already fallacious percentages.

Given the elevated spending levels that both the House and Senate appear to be on their way to adopting, we agree that some new revenues are required to make the budget sustainable over the long term. But subverting state statutes and using fake numbers to justify one approach over another is not the way to decide which approach is best for doing so.

According to ISER's undisputed economic analyses over the last two years, cutting the PFD has the "largest adverse impact" on the overall Alaska economy, is "by far the costliest to Alaska families," and because it takes money only from Alaska residents rather than other alternatives which would draw also on non-residents, costs the Alaska private sector the most of all of the various "new revenue" options.

In short, if you are concerned about the overall Alaska economy, Alaska families and the Alaska private sector -- which we would hope legislators are -- cutting the PFD should be the last option taken, not the first.

There are better ways. 

As we have discussed elsewhere, implementing Governor Hammond's original 50/50 plan for drawing funds from the Permanent Fund earnings, then using a flat tax to fill the remaining gap, not only has a smaller impact on the overall Alaska economy than other options, it also is less costly to Alaska families and, because it raises a proportionate share from non-residents receiving income in the state, also costs the Alaska private sector less. See Notes from the Alaska Fiscal Cliff: Our Proposed Fiscal Solution (Nov. 2017).

Rep. Ortiz doesn't even analyze that or other, similar approaches. He simply adopts the worst approach, first, and then seeks to cover his tracks using fallacious percentages and fake numbers.

Let's be crystal clear about one thing. Under the current state statutes it's not the level of the current PFD that is threatening future PFD levels; it's the government's overtake of its share of earnings.

We are deeply disappointed in Rep. Dan Ortiz (just as we have been previously with others that arguing similarly -- again, Sen. Mia Costello comes immediately to mind) for subverting the statutes and making up fake numbers to claim otherwise.

It's bad enough to make the wrong decision. It's worse to then try to cover it up by using fallacious reasoning and fake numbers.