By JON FAULKNER
It is time to put Alaskans first and fix the PFD formula in our Alaska Constitution.
We hear many objections why this is not workable, but none that honor the will of the people. Our Legislature is accountable for this impasse.
In short, a showdown looms: The people of Alaska vs. the Legislature. Do we trust the voters with the Permanent Fund, or do we stand by and watch the political process destroy this legacy?
The adage “follow the money” leads us to the problem, and the solution. The big rub to politicians is the PFD. Every year since Gov. Bill Walker defied the then-existing law and bypassed 40 years of legislative practice, politicians have eyed the Permanent Fund with increasing appetite for your dividend.
Former Gov. Jay Hammond would be upset over this turn of events. He warned, “Of one thing I’m sure…as go dividends, so goes the Permanent Fund. Cap, reduce, or eliminate the PFD and the Fund will follow suit.”
This is wisdom from a man who loved Alaska, who understood the meaning of “sustainability” and that oil wealth belongs to our people in common, for all generations, and that a fair return on that wealth belongs to residents. Hammond knew that once politicians found a chink in the Permanent Fund’s armor, they would invent endless schemes to grab it. His solution: A dividend that was large enough to incentive Alaskans to resist systematic plunder and to vote out politicians who mismanaged the Fund.
A constitutional amendment must pass both houses of the Legislature so consensus is essential. But it must also garner a popular vote, so political compromise should consider the people’s wishes.
Fortunately, years of discussion has focused the central debate. It now centers on the right percent of market value (POMV) to draw for all expenses, including inflation proofing, vs. honoring the “Original Formula” for dividends. But first, where are Alaskans in agreement?
Few dispute anymore that some share of earnings from natural resource extraction belong to Alaska residents. Alaskans embrace the concept of an “owner state.”
Moreover, there is consensus that the PFD is not welfare. True, Alaskans don’t labor for their dividend, but we own the land. And although some spend their dividend recklessly, most spend it wisely.
Alaskans find common ground with economic data that shows PFDs directly distributed to Alaskans have far greater economic impact to our state and local economies than money doled out to the public sector. We agree with the Institute of Social and Economic Research that lowering dividends disproportionately hurts the poor and that reducing our dividend by $1,000 pushes thousands of Alaskans below the poverty level. Likewise, Alaskans generally agree that among various policy choices to reduce spending, like reducing the state work-force or capital spending, cutting the PFD is the least favorable option.
Also, Alaskans begrudgingly accept the Supreme Court ruling that annual PFDs require legislative appropriation. But there was legislative consensus for 40 years before that to follow the law and deposit PFD allocated earnings directly. The practice of “earmarking” or automatically appropriating funds is common practice, as $1 billion is declared “off-limits” via bi-partisan truce. All Alaskans expect is equal regard for the PFD.
We also have consensus on inflation proofing. The Legislature inflation proofed all but two years between 1980 and 2015. Yet between 2016 and 2018, it failed to inflation proof five out of eight years. 2021’s record deposit of $4.18 billion helped offset the deficiency but inflation is real and Alaskans agree inflation proofing should not be optional.
Finally, Alaskans share a profound sense of gratitude, both for our forefathers, and for the opportunity to show the world how to honor future generations by saving—not squandering—our inheritance.
Consensus on budget priorities is not necessary to pass a Constitutional Amendment. Budgets are divisive, and a Legislative function. Disagreements on spending will always exist, as will lobbyists, special interests, and elections. The PFD is too important to be enmeshed in this.
With respect to the PFD, most agree funding must be sustainable and yet the dividend amount can fluctuate. Thus, the original formula is ideal, insofar as it was 100% funded from realized earnings, saved and set aside for dividends. It was rock-solid sustainable until lawmakers wanted more.
As a policy alternative, lawmakers now propose draws based on “Percent of Market Value” ostensibly to stabilize revenue streams, and to treat the dividend as part of its annual budget. This is understandable but problematic as recent history shows, because it projects what is expected based on past performance and then bakes it into a budget, regardless of whether the revenue materializes or not. This leads to unfunded budgets.
Witness the returns of the Permanent Fund over the last five years: Barring the single year sell-off of 2021, an historic outlier, the other four years averaged only 3.047%–not enough to cover inflation and expenses. Lawmakers would need a fiscal cushion to protect the PFD.
The original PFD formula is sustainable and provides for adequate inflation proofing, but is the amount too high? Consensus can derive from long standing, global precedent, which is the standard 12.5% royalty fee. This amount is paid to virtually every subsurface estate owner worldwide. Moreover, only 25% of all mineral-based revenues go into the Fund, while government takes 75%. Thus, the 50% of earnings (averaged over 5 years) mandated for the PFD derive from only 25% of the State’s royalties. Thus, the 12.5% of mineral-based earnings for Alaska residents as their royalty share is a wonderfully elegant solution with global precedent.
Finally, in forging a path forward, Alaskans should heed the advice of those who created the Permanent Fund, like Oral Freeman and Hugh Malone, for without their wisdom Alaska would not have a Fund. These Alaskans rejected political interference, schemes to leverage the Fund, to invest in regional infrastructure or high-return ventures that invited risk.
Alaskans are keenly aware of the challenges we face of declining oil, of downsizing government and diversifying our income sources. But we are amazingly unified in our desire to pass a constitutional amendment that protects the original PFD formula, and we trust the people will ratify it.
Jon Faulkner was born and raised in Alaska and owns businesses on the Kenai Peninsula.