Brad Keithley’s chart of the week: It’s not the PFD that’s the issue

Those reading some sources of local media – or better yet, the #akleg stream on Twitter – may think that the increase in government spending approved this week by the Legislature is attributable if not entirely, at least mostly to higher Permanent Fund Dividends (PFDs). See, for example, the editorial board op-ed in last weekend’s Anchorage Daily News, “Even Drunken Sailors Know Better.”

Yes, the FY23 PFD is higher than it has been in the past. But even counting the “energy relief” portion included first by the House and subsequently also adopted, in part, by the full Legislature, it’s still not at the levels provided by current law. Instead, the FY23 PFD falls $560 million – more than half a billion dollars – below statutory levels.

And even though the Legislature had the fiscal space to increase the FY22 PFD in its FY22 supplemental, it didn’t and the FY22 PFD is still $1.77 billion below the level provided by current law.

The result is, combined over the two year period at issue in this year’s session (FY22 supplemental and FY23), the portion of the PFD paid falls more than $2.3 billion – 44% – short of statutory levels.

Indeed, the combined amount falls significantly short even of the POMV 50/50 approach. Combined over the two years a PFD calculated on the basis of POMV 50/50 would equal slightly more than $3.2 billion. The actual amount being paid over the two years, however, is around $2.5 billion, more than 20% below POMV 50/50 or, put another way, less than 40% of the total POMV draw over the period.

So, if it’s not the PFD that’s driving the budget increase, what is?

To analyze that we have looked at the UGF budget the way it used to be, before 2017 when, contrary to its own definitions (see the discussion at the link at “DGF/UGF”), the Legislative Finance Division (LegFin) reclassified the PFD as “UGF” (unrestricted general funds). Returning the PFD to the way it was treated before that point and still should be according to LegFin’s own definitions – as part of DGF (designated general funds) – does a lot to reveal what really happened this year.

Here is UGF and PFD spending (stated separately) in the five years before this session compared to the FY22 budget after supplementals and the FY23 budget as passed by the Legislature Wednesday evening (the “adjourned” version).

As is clear, after an extended period of relative stability, non-PFD UGF spending skyrocketed this session.

Over the 5 year period from FY18 through FY22 (as enacted last year, before supplementals) non-PFD UGF spending averaged $4.66 billion.

As a result of the supplementals added this session, FY22 non-PFD UGF spending now exceeds $5.6 billion – $1 billion (22%) more than the $4.6 billion the Legislature thought adequate for FY22 just last year.

And FY23 non-PFD UGF spending now is targeted to reach nearly $5.9 billion – $1.2 billion (26%) more than the previous five year average.

Put another way, in a session when the Legislature hasn’t even paid out the equivalent of a POMV 50/50 PFD over the two years at issue, non-PFD UGF spending for FY22 supplementals and the FY23 budget has exploded by a combined $2.2 billion, or an annual average of $1.1 billion (24%), over the relatively stable spending levels maintained over the previous five year period.

That compares to an annual average increase in the PFD over the same two year period of only $620 million (including the “energy relief” payment), roughly half of the increase in non-PFD UGF spending.

In short, it’s not the PFD that’s driving this session’s spending increase, it’s the explosion in non-PFD UGF spending.

Who is funding the increase in non-PFD UGF spending? Previous readers of these columns will know the answer. It’s middle and lower income Alaska families.

Here is the distributional impact of the combined $2.3 billion PFD shortfall over the two year period ($1.15 billion annual average), which has been used instead largely to offset the combined $2.2 billion increase in non-PFD UGF spending.

As a share of income, low income Alaska families are contributing nine times more, middle income Alaska families three times more, and even those in the upper middle income bracket, two times more than those in the top 20%.

It’s even worse when compared to those in the top 5% and top 1%. Low income Alaska families are contributing 18 times more, middle income Alaska families six times more and even upper middle income Alaska families four times more than those in the top 5%. The multiples are 33 times (low income), 12 times (middle income) and seven times (upper middle) when compared to those in the top 1%.

Some argue that, after years of “suppressed” budgets, the explosion in non-PFD UGF spending is “needed,” justifying the offsetting PFD cuts.

But even if the entire $2.2 billion in additional non-PFD UGF spending is “needed,” that doesn’t justify using PFD cuts to fund it.

As we have pointed out repeatedly in these columns, of all of the various options, funding spending through PFD cuts has the “largest adverse impact” on both 80% of Alaska families and the overall Alaska economy.

If the $2.2 billion in additional spending over the two year period is, in fact, “needed” by Alaskans, there are far more equitable and lower impact ways for Alaskans to pay for it.

Here is the distributional impact of using various other methods for raising the same amount of money that, in the final budget passed Wednesday evening, the Legislature has raised instead through FY22 and FY23 PFD cuts.

The impact of PFD cuts are in blue, sales taxes in red, a flat tax in gold, and a progressive income tax in green.

As is clear from even a casual review, any of the other alternatives produce far more equitable results than using PFD cuts. As we’ve explained previously, because they are much less regressive than PFD cuts and, as importantly, also bring in revenues from non-residents, all of the alternatives also have a lower adverse impact on the overall Alaska economy.

As this comparison shows, we get why many in the top 20%, and especially in the top 5% and top 1%, continue to push PFD cuts to pay for spending. To them, it’s by far the lowest cost way to contribute.

We also get why many who are now, or in the future anticipate being in the top 20% during their prime earning years, support any effort to cut current PFDs in order to “build savings.” As we explained in a previous column –  “The Yuppie Version of Fiscal Responsibility” – they view that as a way of having current middle and lower income Alaska families buy the top 20% insurance against having to pay equitable taxes also in the future.

But for the remaining 80% of Alaska families now and in the future, and through them, the overall Alaska economy, using PFD cuts takes the most – has the “largest adverse impact” – of any of the alternatives.

That’s precisely the course chosen by this Legislature, however.

As we’ve explained in previous columns, with the influx of additional revenues, the Legislature this session had the perfect opportunity to transition to a more equitable, lower impact fiscal future. The Legislature’s 2021 Fiscal Policy Working Group even outlined the path.

But this Legislature has blown the opportunity. By going big on non-PFD UGF spending without developing a more equitable and lower impact means of paying for it, this Legislature has left future governors and legislatures – and with them, future middle and lower income Alaska families – with an even tougher road ahead.

Despite the assurances they wouldn’t if only given one more chance, from the perspective of middle and lower income Alaska families the Legislature once again has “pissed away” Alaska’s fiscal present and future.

Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on its Facebook page or by subscribing to its weekly podcast on Substack.

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Lynn Willis
1 year ago

Another week, another iteration of the same populist message: “Spend it on me not on thee” to keep me in office. While we have a statutory obligation to pay a PFD, don’t we also have a constitutional obligation to repay the Constitutional Buget Reserve fund that has now been seriously depleted? That obligation to future generations should not be dismissed as some “Yuppie version of Fiscal Responsibility”.

1 year ago
Reply to  Lynn Willis

“Another week, another iteration of the same populist message: ‘Spend it on me not on thee’ to keep me in office.”

When did the author take public office?

We do have a constitutional obligation to deposit funds left over at the end of each fiscal year in the CBR fund. There is no constitutional obligation to cut off spending so that can happen, however.

Getting real about revenue would be a step in the right direction. Giving Permanent Fund earnings away to Outsiders & foreigners isn’t helping us preserve our savings accounts. It’s also a constitutional violation.

1 year ago

This will be, even adjusted for inflation, the next-to-largest PFD we’ve ever had. Yet you continue to echo ‘PFD cuts . . . . PFD cuts . . . . . PFD cuts . . . . .’ You’re a one-trick-pony Brad, and I doubt you can personally relate to those of us of limited means you profess to care about.

1 year ago
Reply to  Martin

It appears that you haven’t been reading this series of articles.

1 year ago

These are informative, if repetitive. But, no matter how much you repeat it, failure to give a handout is not a tax. There are better ways to help the needy and even stimulate the economy than handing out an allowance to be spent on TV, plane tickets and coĺlege savings plans.

1 year ago

I totally agree with is report, our elected officials are not giving Alaskans what they’re supposed to. It’s been pandemic for 2 years and counting , we deserve the full amount of a Pfd, it’s the peoples money not the politicians. Don’t confuse running the state with lining your own pockets to do pet projects like fixing two ports in the state during a pandemic and oh ya how bout that inflation, please be proactive for the Alaskans who depend on that check yearly. It should be as big as it’s supposed to be as it was intended. Thanks for… Read more »

1 year ago

If you could have your charts pop out to a larger version, otherwise they are really just colorful heiroglyphics taking up space. Just very hard to read as is.

Brad Keithley
1 year ago
Reply to  Bakeshop

The versions at pop out.

1 year ago

Brad, Side question about the distribution of the this current PFD + Energy Supplement of $3200 approx. Would it have more economic impact on Alaska by dividing up the distribution, say half now and half in October, than just doing it all at once in Oct?

Brad Keithley
1 year ago
Reply to  Eugene

By statute, the PFDs passed each session are based on revenues to be received the following fiscal year (which begins July 1), so they are timely only after that date. The payments are timed by law to October, historically to serve as a source of funds as Alaskans prepare for the coming winter (and conveniently, every two years right before an election). Some economists have argued that, because they are distributed in lump sum, they are susceptible to high priced impulse spending and might more consistently be plowed back into the state economy if distributed in quarterly or monthly installments.… Read more »

Some Guy
1 year ago

Did Jeff Landfield die?