Protecting the Permanent Fund and Following the Law
Alaskans established the Permanent Fund—our savings account—by approving a constitutional amendment in 1976. The amendment provides for using the Permanent Fund principal for "income-producing investments" and depositing "all income" in the general fund "unless otherwise provided by law." The Alaska Constitution has never provided for a dividend. The legislature authorizing paying dividends in the early 1980s by passing laws. The Alaska Constitution allows spending Permanent Fund earnings, but it does not allow spending the Permanent Fund principal.
Permanent Fund earnings now account for over 65% of the funding for state government and reflects a change from Alaska being an "oil state" where 85% of funding for state government came from oil taxes. Recognizing this change from an "oil state" to an "investment state," in 2018, the legislature passed a law, SB 26, that caps the annual withdrawal from the Permanent Fund earnings at a sustainable level. Under the SB 26 law, AS 37.13.140-145, 5% of the total value of the Permanent Fund—called the percent of market value or “POMV” draw—is available for appropriation by the legislature every year. The legislature passed SB 26 to make sure that earnings from Alaska’s last savings account is available to maintain essential services for future generations.
The law caps the legislature’s appropriation authority by constricting the funds available for expenditure. In his line-item vetoes and press statements, however, the governor wants to break this law by overdrawing the Permanent Fund earnings reserve account for the purpose of paying a larger dividend. Except for officials appointed by the governor, financial analysts consistently agree that overdrawing the earnings reserve is not a responsible solution to Alaska’s financial challenges.
The continuing debate raises questions about the legislature's obligation to follow the law when it makes appropriations. The Alaska Supreme Court has consistently ruled that statutes establishing a formula for certain expenditures, including the dividend formula, do not require appropriations according to statutory formulas. Instead, recognizing that state government has limited funds, the dividend program and other state programs “must compete for annual funding.”
In contrast to laws that provide a formula for expenditures (described as "thou shall spend" laws), the Alaska Supreme Court has not considered a law like SB 26 that places a cap on the funds available for expenditure (described as "thou shall not spend" laws). Attorneys with a history of suing the state about appropriation matters have suggested that the cap established in SB 26 is different from an appropriation formula because it limits the funds available for the legislature to appropriate. The currently approved budget does not break the law that established a revenue cap in SB 26.
In this year's approved budget, there are examples of appropriations that do not "follow" appropriation formulas. As discussed earlier, the legislature appropriated $4 billion from the Permanent Fund Earnings Reserve Account to the Permanent Fund principal, which provides a greater amount of inflation-proofing to the Permanent Fund principal than the formula set forth in AS 37.13.145(c). Had the governor vetoed this $4 billion appropriation, as he intended, the governor would not be following the law. In earlier years, including FY 2017-FY 2019, the legislature did not make an inflation-proofing appropriation.
The legislature's appropriation of over $730 million to pay a dividend of approximately $1,100 did not follow the formula in AS 43.23.025, but it follows the Alaska Supreme Court's decision that the legislature is not required to appropriate funds according to the formula and the dividend program must compete for funding with other programs. The governor's line-item veto of the entire dividend does not follow the formula.
For school bond debt reimbursement, the legislature followed the formula in AS 14.11.100 in appropriating approximately $83.5 million, but then failed to fund the appropriation when it did not approve funding from the Constitutional Budget Reserve by the required 3/4 majority in both the House and the Senate. Similarly, the legislature followed the formula in AS 14.11.025(b) in appropriating Rural Education Area Assistance (REAA) funds for small school districts, but the governor did not follow the formula when he used his line-item veto authority to reduce the appropriation by 50% from $34 million to $17 million.
Finally, the legislature followed the formula for community assistance in AS 29.60.850 in appropriating approximately $38.9 million from the general fund and $12.4 million from the power cost equalization fund to keep the community assistance fund at its statutory funding level. But the legislature did not follow the formula when it did not approve funding for the power cost equalization transfer by the required 3/4 vote. And the governor did not follow the formula by using his line-item veto to eliminate the $38.9 million appropriation from the general fund.