Sweeps and Lapses: The mystery of the General Fund

By
Suzanne Downing
-
26
Art Chance
Art Chance

By ART CHANCE

Yesterday the media erupted with talk about “accounting quirks” and sweeps, like this is some sort of governmental arcana that only the initiates could comprehend.

It’s really pretty simple stuff and the bureaucrats mystify it to confuse the public and simple-minded reporters.

Here’s the first rule: The Alaska Constitution, with some very old and limited exceptions, prohibits dedicated funds; in other words, no general revenue can be dedicated to a specific purpose unless specifically appropriated to that purpose, and Operating Budget appropriations are only good for one fiscal year.

This is a real hindrance to bureaucrats.

I really don’t know if this stuff was around earlier, but I only became aware of something called “sub-funds of the General Fund” in the Nineties. Maybe they’d been playing this game all along and I only got far enough up the food chain to know about it by then.

Here’s the rule if you follow the Constitution: at midnight on June 30 any appropriated funds not expended or already obligated lapse back to the general fund. That’s why bureaucrats go on spending sprees in May and June; if you don’t spend it, you lose it, and not only do you lose it, if you don’t spend it your base is reduced for the next year. We can talk about how stupid that is later.

Somewhere along the way the bureaucrats developed the concept of sub-funds of the General Fund in which rather than lapsing money, they kept the money in their budget as what was essentially a slush fund.

In the Nineties when I worked for the Legislature, the great threat to the bureaucrats was sweeping the sub-funds.   A sweep was DefCon 2, going to the Constitutional Budget Reserve and needing a three-quarter vote was DefCon 1 in Legislative nuclear war.

Sometime in the Palin/Parnell/Walker years the sub-funds came to be known as “designated general funds.”  Frankly, there is no such thing and the whole concept is unconstitutional. There is no such thing as designated General Funds.

So what Legislative Budget Director David Teal et al. are talking about is what back in a sane world was once  known as lapses: If you didn’t spend it, at midnight like Cinderella’s slipper, it disappeared into the General Fund.

The dirty little secret of State government is that it is nobody’s job to ensure that the State obeys the law and follows the rules, so unless somebody gets angry enough about something and is well-connected enough to get a powerful legislator’s attention, nobody is really going to look into what the Executive Branch does.

Here’s the reality: At 12:01 am on July 1, the State has no Operating Budget money. They can talk about sub-funds, but let’s talk about the appropriation that supports that sub-fund; there isn’t one. It is all a fiction.

The State has created some funds like Power Cost Equalization or the “forward funding” of Education. It is highly questionable whether any of these and other similar funds are Constitutional. Now, the current propaganda is a scare tactic for rural legislators; nobody in rural Alaska wants to pay what their electricity actually costs, but it is a legitimate question whether the PCE fund is legal; my thought is that it isn’t, but it is politically expedient.

So, we’re playing political “chicken.”  I’m no fan of Power Cost Equalization, but I think we ought to at least have a robust debate about it. This is just “gotcha” politics. The State has money in coffee cans and mattresses on the 11th Floor of the Juneau State Office Building.   If you want a sweep, sweep the sub-funds, sweep the “appropriated but unexpended” Capital funds. There is a lot of money lying around.

This isn’t an argument for a $3,000 Permanent Fund dividend, because I’m not a dividend fan; we have far too many lower class and emotionally disturbed here living off welfare, crime, and the dividend.

But Alaska isn’t broke; we’re just letting the bureaucrats dictate the terms of our budget.

Art Chance is a retired Director of Labor Relations for the State of Alaska, formerly of Juneau and now living in Anchorage. He is the author of the book, “Red on Blue, Establishing a Republican Governance,” available at Amazon. 

26 COMMENTS

  1. “Alaska isn’t broke” this bears repeating, because we aren’t broke but our spending plan is trying to make it so. When legislators say we don’t have the money to pay the PFD they are lying, what they should be saying is we don’t have the money to pay for all the other things we want to pay for so we want to take the dividend to pay for the things we want. The dividend is paid out of the PF Earnings Reserve, it does not cost the state a dime. Thankfully we still have a few courageous legislators, not enough, but a few who would cut the bloated government.

    • Except it does cost the State several dimes. The ER earns a similar rate to the Corpus and those earnings determine the amount transferred into the General Fund to pay for dividends and government. Obviously it doesn’t take much rocket science to note that a greater balance in ER translates into greater earnings (unless the markets are dropping).

      • Actually all of the costs associated with dividends are paid by the fund itself, the dividend does not cost the state a dime. The Permanent Fund Division is a division of the Department of Revenue and is fully funded from the PF Earnings Reserve.

        Department of Revenue, PFD Division Administrative Cost $8,218,800.00
        Total Department of Revenue, PFD Division $8,218,800.00

        https://pfd.alaska.gov/LinkClick.aspx?fileticket=xSf7lOemqWY%3d&tabid=506&portalid=6&mid=6428

        • Don’t you read, Steve-O?
          By paying a smaller PFD, the ER is kept at its larger amount by that amount not paid out-for example, the last three years reduction amounts to several $ billions. Those billions earn money that along with the Corpus billions that together give the total Fund earnings used to determine the amount transferred to the General Fund (for PFDs and government appropriations). I suspect the amount of earnings from these hold-outs from statutory PFDs is quite considerable and these amounts have been used, so far, to pay for government services. Had they been paid out in PFDs, rather than kept in ERA, less would have been available last year and this that are not funded by Permanent Fund.

          • Bill,

            I don’t think you understand the meaning of the word dividend. I’m not arguing that saving more money results in having more money, that is obvious and only a fool would argue that…

          • I’m not sure what you are arguing Steve-O but you said paying the dividend doesn’t cost the State a dime and I’ve pointed out that it, in fact, costs the General Fund (since the POMV formula of last year). Prior to that POMV legislation, the money not paid out in statutory PFDs gave additional money to ERA which, in turn, allowed for a greater total PF earnings that figured into the amount transferred to the General Fund (both for PFDs and government services). Obviously, the amounts involved are not something I’m privy to and you may need to ask those directly involved with the Permanent Fund (or David Teal) but in any period of increased earnings the reductions in the ERA (for dividends) will end up costing the State more than your dime.
            It doesn’t matter what you think the meaning of “dividend” is, either as I’m quite sure that it’s defined in the legislation.

          • Bill,

            The dividend does not cost the state a dime, period, full stop, end of story. Read the links I provided if you do not believe me, the dividend and administration thereof is paid for by the ER fund itself.

          • Steve-O, for your own reasonings, you are not listening to my argument.
            You are not considering SB26 (passed last year creating the POMV)-now the Legislature can ignore their own statute but you cannot.
            Your argument about the administration of the Fund and Dividend is correct but the transfer from ERA to the General Fund for this POMV would be reduced in future years (for any reduction in ERA balance)-this reduction would be for both PFDs and govt. services. Most of this was worked out last year and is the reasoning for the limiting of 5.25% of Fund for three years before dropping to 5% thereafter.
            So far this Legislature has balked at ignoring this statute, passed by many here also from last years Legislature, but that could change at any time.

          • Bill,

            Whatever it is you are arguing the dividend does not cost the state a dime, earlier you were arguing it did cost the state “several dimes” I’ve shown that is incorrect. If you are arguing saving money results in keeping more money, I’ve already responded to that as well when I said “only a fool would argue that…”

          • No doubt Bill, no doubt. If you still think the dividend costs the state money then do you also think that not having an income tax costs the state money? You see the PF Division is a division in the Department of Revenue, it does not cost the state anything to administer. Now if your argument is that they could take more, then that is one thing…just like with an income tax, they could institute an income tax and take more money from people. That does not mean it costs the state anything, it just means the state is not taking more from it’s citizens.

    • Steve-O, if you don’t understand the POMV program just say so.
      Anyway, here is an example of how removing money from ERA, in the form of say a dividend of an additional $1 billion, costs the State money: I used $1 billion because that’s the approximate amount a statutory PFD would need to cost (over what some have suggested). That $1 billion would earn money for ERA through the magic of compounding, that allows for a 5.25% maximum draw for both dividends and government services-note here that just the $1 billion (removed without the compounding earnings) amounts to $52.5 million that would not be available to all future years POMV transfers for both dividends and govt. services. One can argue how much of this should go towards each category but that really has nothing to do with the fact that this over $50 million is gone forever from ERA and it is lost to the draw every year for that POMV amount. An argument on the amount here that goes to the PFD may clearly not cost the state but it’s impossible to argue that the amount lost to future government services is no cost to the State.
      You say this costs the state not a dime but I say it is front and center in the issue of how much the State can afford to pay out in PFDs.

      • So now it’s clear where the disconnect is, you think that cost and rate of return are the same thing, they are not. I would think that as a commercial fisherman you would be used to dealing with spreadsheets where expenses are on one side and revenue is on the other. Take for example the cost you are paid per pound for salmon during the season, let’s say it is $1.00 just for the sake of argument then after the salmon is sold and you were hoping to get a true up of $0.10 but instead you only get $0.05, that true up didn’t cost you anything, you simply did not receive as much as you hoped for or figured you would. Cost=expense. The dividend does not cost the state a dime. The Dividend Division is in the Department of Revenue for a reason.

        • Like I said Steve-O, if you don’t understand the POMV just say so rather than try to call it something it isn’t.
          It has nothing to do with “rate of return” either as that $1 billion is just balance that would be removed from PF ERA-the compounded rate of return on that $1 billion is based on whatever rate of return is earned in any one year but the $1 billion is not.
          Anyway, it doesn’t matter what you want to call it, that $1 billion removed from the balance of ERA will result in a $50 million reduction in the amount transferred to General Fund for every year from the time of it’s removal (plus whatever “rate of return” on that money). To me, that’s a cost to the state and has nothing to do with your “true up” or anything else you want to call it.
          And that 5.25% rate allowed the first three years and 5% afterward has nothing to do with “rate of return”, either. It is just an percentage agreed on in statute that is supposed to allow the fund to last “forever”. Most fund advisors suggest a rate closer to 4% is warranted to keep a fund solvent but our Legislature needed a bit more, it seems.

          • Those are not costs. It’s simple accounting, revenues and expenses, + and – nothing more nothing less. The PFD does not cost the state any money whatsoever.

            And our legislature did not need “a bit more”, they wanted more. It’s called a money grab.

          • Well Steve-O it doesn’t really matter what you call it, but the fact of the matter is that future revenues are given up for each dollar of PFD dispersed-this POMV thing makes the dividend compete with other appropriations. And I don’t recall your objections when this policy was adopted. At any rate, we are saddled with it now and will get to see how it fares going forward.

  2. “because I’m not a dividend fan” Well Art I liked your comments most of the time but this one doesn’t pass the Milton Freidman smell test for individual property ownership earned by government application and vestment ! Besides the mineral rights taking to boot! Isn’t it great to be a second class citizen in land ownership by virtue of statehood! Its sick in may mind and the PFD is and was a “balance of equity” of the statehood act making us surfs of the state!

    • Except perhaps among some really ideological libertarian/Alaska Independence types, there was absolutely no discussion of either the Permanent Fund or the Dividend as some sort of recompense for mineral rights at the time of their enactment. The whole of the discussion was about the State having pissed away the money from the Prudhoe Bay lease sale and the desire on the part of some influential members of the business community to lavish money on development. Gov. Hammond called them the “rape, ruin, and run” crowd.

      I was a lot further down the org chart in those days and pretty naïve about how totally incompetent and corrupt State government was, so I was a lot more sympathetic to State run development and State run enterprises then than I am now. I was closer to the “rape, ruin, and run” crowd than to the pro-Permanent Fund, anti-development types. The Permanent Fund and putting any available money in the Fund rather than spending it on any sort of infrastructure or development has always been a leftist cause celebre. In the Seventies and early-Eighties, “Save it” was just code for lock up the State.

      Over time I’ve become more approving of the Fund and of saving money because I’ve seen first hand how corrupt and wasteful the State is. The feeding frenzy between ’06 and ’14 is simply appalling. Unfortunately, we started it in ’06 because we were facing an election and Sarah Palin and Tony Knowles were promising everything to everyone and offering sprinkles, nuts, and cherries on top. Palin gave away money like a drunken sailor and then when she faced a downturn in revenue ran away from the Third Floor rather than have to say no to anyone. Parnell and the Legislatures during his tenure had no more sense or discipline. Walker was simply a tool of the healthcare, education, and public employee union rackets. The House Majority is simply a tool of the same three rackets.

      So, to me, the Fund and the Dividend are both symbols of Alaska’s inability to govern itself. The immutable law of public finance in Alaska is that however much money there is to spend will be spent, and the only way to prevent that is to put the money where the Legislature and the Governor can’t get their hands on it. So, I’m not a Dividend fan, and my acceptance of it is at best grudging.

  3. I’m rolling with Mr. Martin on this one, Art. You are usually consistent. To off the PFD on count of societal dregs, at the expense of us who will use the dividend for legal living costs, is inconsistent with prior comments. The dividend stimulus will uplift spending and create a strong market. The dividend takes money out of the hands of those bureaucrats you so despise.
    .

  4. Art, I have seen what you have talked about in action. While in the military, back in the 70’s, I witnessed this carry over in vehicle use and allocation.
    The supply squadron had a vehicle up on jacks to keep the rear wheels suspended. It was running and the back wheels were spinning pretty good. When I asked what was happening, a Master sergeant replied that to keep the vehicle assigned to them it had to have a certain amount of mileage for the fiscal year. Since the vehicle had less than the required mileage, they were running up the speedometer to get above the required mileage. This way, that supply squadron got to keep that extra vehicle for another year. That is just a small microcosm of what you describe.

  5. I think we the citizens of Alaska can find ways to spend our PFD better than the rip-off people in Juneau.

    If anyone else isn’t a fan of the PFD they can feel free not to apply for one or donate it to a charity or back to the State Government, with my blessing. But do not presume to speak for me or any of the other residents of Alaska that want their full amount as is right!

    • Your “right” is a creature of 21 and 11 votes of the Legislature and another 21 and 11 votes can do pretty much what they want with that right. Learn something about the government, and, no, I’d never presume to speak for people who are clueless.

  6. I’m with Art on this one. The idea that the individual PFD payments are a substitute for the mineral rights payments we never will get (because our constitution was written after the socialist mindset had corrupted even the hardy Alaskan mindset) isn’t even good subterfuge. In states that are smart enough to recognize the value of having mineral rights income go to folks smart enough to purchase and maintain ownership of income producing property, those monies create useful things among useful citizens. But here, the PFD simply goes as free government handout (functioning as the primary controlling puppet string in the hands of a the most power hungry puppeteers in the state) to an ever growing crowd of pot-smoking, work-dodging, welfare-dependent puppets who never will contribute anything of value to the broader community systems or to resource development. The PFD simply assures a growing supply of fools dragging down the overall productivity of our state and and a growing supply of customers for the addiction industry.

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