The Friday Alaska Landmine Column: It’s not the PFD that’s the issue (5.20.2022)

Some claim it's the PFD that's causing the explosion in spending this session, but its not; it's the increases in the FY22 supplemental and FY23 operating & capital budgets

Over the past few months we have been writing a weekly column, published on Friday’s, for the Alaska Landmine. Beginning earlier this year we also started circulating them through our Substack page. For those interested, the previous columns are collected here. This week’s column appears on the Landmine here.

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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.