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Permanent fund bill based on POMV Proposed statute would allow withdrawals from earnings reserve based on market value of fund, not on fund’s realized earnings Alan Bailey Petroleum News
With some broad consensus among lawmakers on the need to use earnings from Alaska’s Permanent Fund to help fill the projected shortfall in the state’s funding requirements, but with some differing views on the specifics of how those earnings would be apportioned, House and Senate versions of a bill for future use of the earnings agree on one point: Fund withdrawals would be based on a percentage of the market value of the fund, or POMV. Currently, Permanent Fund dividend payouts to state residents are calculated based on fund earnings over the previous five years. The Legislature can then optionally use what is left in the fund’s earnings reserve account to either top up the fund’s principal, or for special state appropriations. Endowment approach The theory behind the POMV approach, a withdrawal approach often used by endowment funds, is that the setting of a regular withdrawal rate based on expectations for long-term returns from fund investments will preserve the fund’s long-term value while also accommodating the vagaries of inflation. And, in the case of Alaska’s Permanent Fund, the withdrawal formula would somewhat protect state funding from the ups and downs of state oil revenues. However, since, under the state constitution, funds can only be drawn from the earnings reserve component of the Permanent Fund, the POMV approach presumably assumes that the earnings reserve account would hold sufficient funds to cover the withdrawals - the earnings reserve account accumulates realized earnings from the fund, earnings that result from the sale of assets or interest payments, and not from changes in asset values.
Gov. Bill Walker introduced the original version of the Permanent Fund bill earlier in the legislative session as Senate Bill 26, under the moniker the Permanent Fund Protection Act. At the core of the bill is a statute amendment allowing for an annual appropriation from the Permanent Fund of 5.25 percent of the fund’s average value over the first five of the preceding six fiscal years. The use of the five-year rolling average value would presumably smooth out fluctuations in the fund’s value resulting from changes in the fund’s investment performance. Under Walker’s version of the bill, Permanent Fund dividends would have come from a percentage of the annual appropriation coupled with a percentage of state oil and gas royalties. Walker estimated that this dividend formula would have resulted in an annual per-person payout of around $1,000 per year.
Senate and House versions Versions of SB 26 have now passed both the Senate and the House and require reconciliation if the Legislature is to pass a bill for signature by the governor. Both versions of the bill have preserved the POMV, five-year rolling average approach but each has a different dividend formula. Both versions of the bill also include provisions that scale down Permanent Fund withdrawals in the event that state oil and gas revenues recover.
The Senate version starts with a 5.25 percent POMV Permanent Fund appropriation but reduces this to 5.0 percent from July 2020. However, this version fixes the Permanent Fund dividend at $1,000 per resident for the next three years, through to fiscal year 2020. After that, 25 percent of the annual appropriation from the fund would be divided among state residents as dividend payments. The remainder of the appropriation could be used as a source of revenue for state funding. But the Permanent Fund appropriation for state use would be reduced dollar for dollar by the amount that the annual state oil and gas revenues exceed $1.2 billion. Also, the Legislature would be allowed to protect the Permanent Fund from inflation by appropriating back into the fund’s principal any amount in the earnings reserve account that exceeds four times the POMV payout. And, under the bill, annual state appropriations from its general fund may not exceed $4.1 billion, with that figure adjusted annually for inflation.
Difference in detail The House version reduces the 5.25 percent POMV to 5.0 percent in July 2019 rather than July 2020. This version does not have the fixed $1,000 dividend payment for the next three years, but instead requires a minimum dividend of $1,250 in fiscal years 2018 and 2019. The money allocated for dividend payments would consist of 33 percent of the total POMV amount allocated for withdrawal from the earnings reserve. The remainder of the withdrawal allocation could be used for state funding, but would be reduced by 80 cents on the dollar for every dollar that state oil and gas revenues exceed $1.4 billion, adjusted annually for inflation. The bill also allows the Legislature to return 0.25 percent of the withdrawal allocation back into the Permanent Fund principle, while also preserving the clause in the Senate version of the bill allowing topping up of the principle when funds in the earnings reserve account are especially high. The House version would also enable the Legislature to appropriate from the earnings reserve account any POMV amount calculated for fiscal year 2017 above what has already been paid out in Permanent Fund dividends for that fiscal year. And the House version removes the $4.1 billion cap on appropriations from the general fund.
Both the Senate and the House versions of the bill eliminate the payment of oil royalties at a 50 percent rate into the Permanent Fund from some oil leases. All royalty payments into the fund would be at the 25 percent rate required under the state constitution, with the remaining 25 percent from the higher rate royalties then being paid into the state’s general fund. A sting in the tail And the House version of the bill has a sting in its tail: The bill would only become law if the Legislature enacts a broad-based tax directed at education spending and HB 111, the House bill reforming state oil and gas production taxes.
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