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Tara

Dunleavy’s dividend dilemma

Few politicians have backed themselves into a corner the way Governor Mike Dunleavy (R – Alaska) has since being elected governor in 2018. Dunleavy, who served five years in the State Senate before resigning to run for governor, ran on a platform of a “full statutory Permanent Fund Dividend (PFD)” plus “back-pay.” The “full statutory PFD” means that Alaskans should be paid the full amount per a formula put into statute in 1982.

“Back-pay” would have paid back the amount Dunleavy believed was owed to Alaskans since former Governor Bill Walker vetoed part of the PFD in 2016. After Walker vetoed part of the PFD, a lawsuit challenging the veto was filed. In 2017, the Alaska Supreme Court ruled that the PFD is subject to legislative appropriation. This means that–according to Alaska’s highest court–PFD payments don’t have to follow the statutory formula. They can be determined by the Legislature on a year-to-year basis and are subject to gubernatorial vetoes, just like any other appropriation. And that’s exactly what has happened since 2016.

Given that the state had nowhere near enough money to pay for its budget without using Permanent Fund earnings and dwindling savings (or without enacting substitute sources of revenue), most political observers correctly saw Dunleavy’s “full PFD” and “back-pay” concept as nothing more than a campaign tactic. But the tactic worked. Dunleavy got more than 51% of the vote in 2018, beating Democrat Mark Begich by more than 7%. Walker dropped out after a scandal caused his lieutenant governor to resign, but he remained on the ballot because he bowed out after the withdrawal deadline.

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Oxford

Once Dunleavy was elected, however, reality set in. Dunleavy proposed enormous cuts in his first budget in order to pay a full PFD. The Legislature, which appropriates money, balked. So did many members of the public. In 2019, a recall was launched against Dunleavy. The recall was nominally justified by several questionable actions taken by the Dunleavy administration, but most politicos correctly viewed it as a referendum on Dunleavy’s budget cuts. The Recall Dunleavy group easily got enough signatures to certify the recall. They needed just over 28,000 but turned in more than 49,000 in September 2019. They were in the process of obtaining the more than 71,000 signatures required to get the recall question before voters, but the COVID-19 pandemic all but ended the effort.

Dunleavy continued to push for the “full statutory PFD” in 2020, but the pandemic, coupled with collapsing oil prices, resulted in the Legislature approving a meager $992 PFD – well below the statutory amount.

Then, in 2021, Dunleavy switched course and came out in favor of a “50/50 PFD.” The “50/50” concept splits the annual draw of the Permanent Fund equally between dividends and state spending. On May 12, 2021 Dunleavy held a press conference in Juneau and was joined by more than a dozen legislators, including House Speaker Louise Stutes (R – Kodiak), Senate President Peter Micciche (R – Soldotna), and Senator Lyman Hoffman (D – Bethel). Even Senator Mike Shower (R – Wasilla), an avid supporter of a “full statutory dividend” was there. This position switch on the PFD by Dunleavy represented a watershed moment on an issue that had crippled the state for five years.

On June 28, 2021 – just six weeks after Dunleavy’s “50/50 PFD” press conference – the Legislature established a bipartisan Fiscal Policy Working Group made up of members from both the House and Senate majorities and minorities. Several of its members had stood behind Dunleavy at his press conference on the “50/50 PFD.” In their final report, the working group recommended the “legislature work towards a 50%-of-POMV-draw PFD formula as a part of a comprehensive solution.” It appeared a grand compromise on the PFD issue had been reached. But it only appeared that way.

For nearly a year, the “50/50” concept was accepted by Dunleavy, most legislators, and the public. But in March, the Spring Revenue Forecast projected higher revenues due to soaring oil prices after Russia invaded Ukraine. Dunleavy then abandoned the “50/50 PFD” just like he abandoned the “full statutory PFD” a year earlier by saying he now supported a $3,700 PFD – $1,100 more than the “50/50” amount for this year. Like many Alaska politicians before him, Dunleavy saw high oil prices and started salivating. But things were about to take an even more bizarre turn.

In May, the Senate majority lost control of the budget on the floor and ended up approving a $5,500 PFD – a $4,200 statutory PFD plus a $1,300 energy rebate that the House had previously passed. The amendment passed 10-9 only because Senator Natasha von Imhof (R – Anchorage) was absent for the vote. But Dunleavy started drooling at the prospect of a mega dividend in an election year. He quietly encouraged the House to concur with the Senate’s budget and avoid a conference committee – something so rare the last time it happened was 1982.

The House initially had the votes, which caused Speaker Stutes to delay the concurrence vote four days. Dunleavy, and the Legislature, did not talk to the press or make any meaningful statements during this four-day period. Meanwhile the public was repeatedly told that the Senate had approved a $5,500 PFD. But Dunleavy, who was quietly meeting with House members, secretly pledged to veto the $1,300 energy rebate to alleviate the concerns of those who thought paying a $5,500 PFD was crazy. The House ended up not concurring with the Senate’s budget, falling three votes shy. The Legislature ended up agreeing to a $3,250 PFD – a $2,600 “50/50” amount plus a $650 energy rebate. But the damage had been done.

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We Build Alaska

To recap, in a period of less than four years Dunleavy has gone from supporting a “full statutory PFD” plus “back-pay,” to just a “full PFD,” to a “50/50 PFD,” to a “50/50 PFD plus $1,100,” to a “full PFD plus $1,300 energy rebate” (that he secretly pledged to veto if the House concurred with the Senate’s budget). The teetering and lack of leadership by Dunleavy on this crucial issue facing the state is profound.

Last Tuesday, Dunleavy held a press conference on the budget and his vetoes. I noted his wavering positions on the PFD and asked him if he supports a “full PFD,” a “50/50 PFD,” or a variable PFD based on whatever is happening during any given year. I also asked whether the uncertainty is unfair to Alaskans. He acknowledged that it has been unfair, but would not state what he supports. Rather, he blamed the “previous administration” for breaking the formula and said he was trying to figure out a way to fix it. He then said he supports a constitutional amendment so the people can weigh in on the issue. When pressed about what he supports, he reverted to going back to the “people of Alaska” weighing in, and refused to say what he supports.

During the press conference, Dunleavy noted several times that the current budget, which includes a $3,250 PFD, does not include any new taxes. In fact, no taxes has been one of Dunleavy’s talking points since being elected governor. But this has created another dilemma. When Dunleavy’s first budget came out in December 2018 (inherited from former Governor Bill Walker), the total state spend was $4.7 billion. That was a nearly 20% cut from Walker’s first budget of $5.9 billion in 2015 (inherited from former Governor Sean Parnell). But the current budget is $6 billion, nearly identical to Walker’s 2015 budget, and represents a 26.9% increase from Dunleavy’s first budget in 2019. More than $2 billion of the current budget is for PFDs. By aiming for the highest PFD possible, and pledging no new taxes, Dunleavy has boxed himself into an inescapable place. When, not if, oil prices go down, Dunleavy, assuming he wins re-election, will be forced to choose between cutting the PFD or pushing new taxes – two things he is adamantly against.

A few years back I read Nelson Mandela’s autobiography “Long Walk to Freedom.” One of the main themes of the book is leadership. Mandela explained that after apartheid ended in South Africa, many black South Africans wanted to engage in score settling and violence against their white oppressors. Mandela knew this would end in disaster. He explained that leadership sometimes requires explaining to the people why they are wrong on an issue. While the PFD issue is nothing like apartheid, it is the single largest issue facing the state. And the leadership required to fix the issue will require that political leaders put emotion and politics aside and get realistic with Alaskans.

The vast majority of Alaskans do not understand the state’s finances. We elect people to do that, and they have not done a great job lately. Many voters, thanks to talk radio and misinformation on social media and certain websites, think the budget could be cut in half or that ending per diem for legislators will fix the problem. Both concepts are ridiculous. Faced with a vote on the amount of the PFD, of course many voters will vote for the largest PFD possible. And a vote would not be a “pick a new formula for the PFD” from a list, it would be do you approve “x new formula.” For that to happen, the governor and Legislature would have to agree on and propose a new formula to the voters. That would require leadership.

The only way this issue will get solved is with honesty in leadership. And there is a big lack of that these days. There will be a large number of new legislators next year, meaning any meaningful resolution on this issue will require even more leadership. The price of oil will drop at some point. History tells us that is a certainty. What if it happens between now and next year’s session? If Dunleavy is re-elected, which is likely, what will he do? Will he continue to change his positions or punt this issue to the voters? Or will he lead?

This is the dilemma he, and we all, face.

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R. Hanlon
1 month ago

Excellent analysis Jeff. To put it bluntly, Dunleavy is nothing more than a simple con man. He never intended to give Alaskans a $6700 “back pay” mega-dividend. He knew the math didn’t add up. The money was never there. It was a con from the beginning.

A. King
1 month ago
Reply to  R. Hanlon

He’ll punt. At least Lucy yanked the football with some pleasure and finesse.

North to Alaska
1 month ago

Just an FYI, there will likely be 400,000 more barrels per day of oil flowing through the pipeline in the next few years. Starting with Theta West/Talitha fields as well as Willow and Pikka. It will be stupid to take a 50/50 PFD now.

Lynn Willis
1 month ago

Focus equally on production levels as you do price per barrel. Oil is a NON-RENEWABLE resource meaning it eventually will be gone. I already see comments mentioning ” 400,000″more barrels per day. That “sure thing” is as hollow a promise as Dunleavy’s original PFD promise. If you doubt that, ask whatever happened to Parnell’s (who now has a cushy state job) to his “million barrels a day promise” if we just passed SB21?

Erik Wassell
1 month ago
Reply to  Lynn Willis

The idea that oil is a non-renewable resource is either false, or at the very least, in dispute. Modern technology is finding ways to create oil while removing CO2 from the environment. We CAN have it all.

https://www.fool.com/investing/general/2014/10/12/forget-what-youve-heard-oil-and-gas-are-actually-r.aspx

Lynn Willis
1 month ago
Reply to  Erik Wassell

I am referring to the oil from the ground in Alaska – that is what counts now and for the foreseeable future as we transition to stable alternate sources such as nuclear, geothermal or tidal. I would bet “oil” as we produce in Alaska will be relegated for use as a lubricant or a source of some petrochemicals. Your reference is dated October 2014 which is not exactly “timely” and had it been relevant, gasoline would not be $5.00/gallon 8 years later.

Martin
1 month ago

If Dunleavy is re-elected, which is likely, . . . . ” Let’s hope you’re wrong about that!

Tucker
1 month ago

Not everybody who voted for Governor Dunleavy did so on the promise of a big dividend. You make it sound like everyone who voted for him was only interested in that and not other issues. Not many people agree with everything a candidate runs on. I would have voted for him regardless. As far as I’m concerned the PF should be used for services when needed instead of talking about taxes. The dividend was never meant to be reliable income. However much it is, it’s a gift. Also I would never vote for a Begich. Especially a Mark Begich.

Erik Wassell
1 month ago

Predictably, once again, ZERO mention of the fact that the legislature moved $10 billion from PF earnings into the principal over the past 3 years.

Saying we didn’t have the money to pay a full statutory dividend and fund government is a flat-out lie.

Any cuts to the dividend are one thing, and one thing only: the greed of the top 20%.

Erik Wassell
1 month ago
Reply to  Jeff Landfield

I believe inflation proofing is a separate item than the bills that moved the $10 billion into the principal.

But even if I’m wrong, that leaves $6.9 billion (by your numbers) that was moved into the principal by choice. Enough to pay the full dividend and still leave $4.4 billion to move into the principal or pay for government (again, by your numbers.)

You may think that was the best thing we could have done with the ERA, but you can’t say that it was the only thing we could have done.

Erik Wassell
1 month ago
Reply to  Jeff Landfield

Down $5 billion from December 2021, but still up $14 billion since October 2020. The money *was* there. The legislature could have used it to pay dividends, replenish the CBR, or fund government. But it chose to move it into the principal. Say what you want about the pros of that choice, but you can’t say we couldn’t have made a different choice. Not sure why that’s such a difficult concept. What I’m not clear on is why you keep posting Kiethly’s analysis that dividend cuts are the worst way to pay for state government if you agree with dividend… Read more »

Erik Wassell
1 month ago
Reply to  Jeff Landfield

I know you know your history. The French Revolution, the Russian Revolution. It’s coming. A single family home in Anchorage is over $430,000. Rents are up 14%. Gas and grocery prices are at record highs. US inflation over 8%. But middle and lower middle class salaries remain stagnant. While corporate America and the top 20% get richer. It may not be in five years, or ten, but it will come, like it always has. The fact that a doofus like Trump got elected proves it. The fact that far right parties in Europe are gaining power proves it. As Churchill… Read more »

Lynn Willis
1 month ago
Reply to  Jeff Landfield

We need to save when and what we can. We are again remined that returns to the Permanent Fund are no “sure thing”: We now rely on PF earnings unlike in years past when oil revenues “paid the bills”.

Alaska Permanent Fund expected to have lost value over last fiscal year
(Alaska’s News Source) KTUU Published: Jul. 5, 2022 at 7:15 PM AKDT|

Erik Wassell
1 month ago
Reply to  Lynn Willis

OMG! Our net worth has increased by 25% over the last three years, but the fact that it has dropped 2% in the last six months signifies the end of the world!!!

Lynn Willis
1 month ago
Reply to  Erik Wassell

You point how the difference between a true fiscal conservative and a populist “faking it”. Spend it all now and mostly on you – right? Same “schtick” as Brad Keithly.

Erik Wassell
1 month ago
Reply to  Lynn Willis

And your point is “Screw the people struggling to pay their bills as long as they keep their hands off my millions.”. Got it.

Andrew Grant
1 month ago

The problem that the anti-PFD crowd has is that oil production taxes had decreased after SB21, we were paying oil tax credits out on top of that, and then the average Alaskan saw it as having a thousand dollars taken from them each year. You can call it what you want but that is what happened. You can explain it however you’d like differently, but the average Alaskan views it as the government taking a portion of their PFD each year – which is regressive and unfair because a person on welfare and a millionaire both lose the same amount… Read more »