Legislators agree that using the earnings of the Alaska Permanent Fund would do more than anything else to balance Alaska’s $4 billion annual deficit.
The problem: They don’t agree how to use those earnings.
Sen. Anna MacKinnon, R-Anchorage and co-chairwoman of the Senate Finance Committee, is attempting to find some agreement in the final days of the 29th Alaska Legislature.
From her seat on the Senate’s Finance committee, MacKinnon and others are trying to build a compromise proposal that combines Senate Bill 114, proposed by Sen. Lesil McGuire, and Senate Bill 128, proposed by Gov. Bill Walker, as well as other ideas proposed by lawmakers in the House and Senate.
“It’s the most important thing left to do,” said McGuire, R-Anchorage, of the need to find a Permanent Fund compromise. “If there’s an hour left, that’s what we’d use it for.”
Compromise doesn’t come easy. Spending from the Permanent Fund’s earnings is controversial, and many Alaskans, including some lawmakers, are resolutely opposed to changing the dividend — even if failing to act means the state will run out of available savings and be forced to end the dividend by 2019.
“I think there are folks in the building representing that voice across Alaska,” MacKinnon said. “If you take those folks off the table, my options get very limited.”
The compromise idea
From hearings held this year’s Legislative session and on figures provided by MacKinnon and McGuire, spectators can get an idea of what that ultimate compromise may look like, even if the details are still being negotiated.
“We had time over the last five days, but specifically over the weekend, to gather the Senate troops and coalesce around the principles within (Senate Bill) 114,” McGuire said.
While Walker’s plan calls for drawing a set amount, $3.3 billion per year, from the Permanent Fund’s investment earnings, McGuire’s approach draws a percentage of the fund’s value. In this case, it would be 5 percent, or $2.6 billion at the fund’s present value.
“The feeling is that the percentage of market value approach is a sound policy that will put Alaska on the pathway toward financial stability,” McGuire said.
While the Permanent Fund as a whole is worth more than $52 billion, most of that — or about $45.6 billion, according to the Alaska Permanent Fund Corporation’s February balance sheet — is unspendable without an amendment to the Alaska Constitution.
What the Legislature would use is the earnings reserve, a package of about $7.1 billion that contains the Permanent Fund’s investment earnings.
Alaska’s annual Permanent Fund Dividend is paid from the earnings reserve as well, and any spending from the reserve would affect the dividend.
The governor’s proposal guaranteed a dividend of $1,000 this year, but the dividend would fall in future years to about $300 at present oil prices. As oil prices rise, so would the dividend.
McGuire’s proposal set a floor of $1,000 for the dividend, but in preserving money for the dividend, it provides less money for state operations than the governor’s proposal does.
With no change to the dividend, Alaskans would get a payout of about $2,000 this year.
Those big payouts wouldn’t last. By 2019, the earnings reserve is expected to run out of money as lawmakers use it to pay for day-to-day operations.
A cap on the dividend or a floor on payouts is expected to be part of any compromise proposal.
Clash on credits
The notion of changing the dividend has caused no small outcry, and as the quest for a compromise takes place in the Senate, it’s complicating things in the House, which is considering the state subsidy of oil and gas drillers.
“If we are decreasing the dividend in order to get revenue for the state, but then we’re having to turn around and pay oil companies tax credits, that to me is a difficult comparison to make,” said Rep. Sam Kito III, D-Juneau.
It’s difficult for many lawmakers, MacKinnon said, including her.
“I wouldn’t personally touch someone’s Permanent Fund Dividend without addressing the oil tax credit issue,” she said.
According to a report issued by the Senate Oil and Gas Tax Credit Working Group in December, the state paid $7.4 billion in tax credits to oil and gas companies between 2006 and 2014. Those tax credits are designed to encourage companies to drill in Alaska, creating jobs and economic impact.
In the state’s next fiscal year, Alaska is expected to pay $775 million in credits to oil and gas companies. The state is only required to pay about $70 million, but unpaid credits roll over to the following year.
Last year, for example, Gov. Walker vetoed payments on $200 million in tax credits. Those deferred payments make up part of the $775 million the state is expected to owe next year.
“You either pay now, or you pay later,” Speaker of the House Mike Chenault, R-Nikiski, said last week.
That puts the state in an awkward situation. As it prepares to cut millions of dollars from education, police services and other functions, it is preparing to pay millions more in tax credits to multibillion-dollar oil and gas companies.
Furthermore, with oil prices so low, oil producers are losing money on the North Slope. Under the state’s incentive program, oil producers can collect 35 percent of their losses in tax credits. They can use those credits, through a loophole in the state’s tax law, to erase all of the oil production taxes they would normally pay.
Right now, companies are collecting more in credits than they have to pay in taxes, and because the credits don’t expire in a given year, the companies can roll them forward.
“That’s money we’re not bringing in when prices go back up,” said Rep. Cathy Muñoz, R-Juneau and a member of the House Finance Committee.
Seeing the larger machine
House Bill 247, awaiting a vote on the House floor, cuts the credit system, but many House lawmakers think it doesn’t go far enough.
Muñoz is among them. She wants to see the operating-loss credit cut to 25 percent and Cook Inlet oil producers held to the same standards as North Slope ones. Right now, Cook Inlet producers pay no production taxes in order to encourage natural gas flow for Anchorage and Kenai Peninsula communities.
“That’s pretty much the big discussion from our side now. What do we do about credits?” said Kito.
He wants to see a tighter cap on the amount of credits a single company can collect in a given year.
Interior, Anchorage and North Slope lawmakers, meanwhile, are more concerned with keeping the oil industry — the region’s main employer — stable. Neither side seems to have enough votes to win. The House has delayed voting on HB 247 since Saturday.
Until an agreement is reached on tax credits, one on the Permanent Fund will be much more difficult, MacKinnon said. Until lawmakers can tell their constituents that they aren’t giving up a portion of their dividend for oil and gas subsidies, it’s tough to gain agreement.
“I believe that I lose more legislators both in the House and the Senate if there isn’t a balance that happens with tax credits,” she said.
Right now, MacKinnon is going from lawmaker to lawmaker, trying to build a coalition. “The issue right now is getting people around a particular idea,” she said.
It will take 21 votes in the House and 11 in the Senate to pass a Permanent Fund spending bill.
“I’m not there. I don’t have a majority of folks,” she said.
