The Weekly Top 3
The Weekly Top 3
The Weekly Top 3 (1.27.2025)
Welcome to The Weekly Top 3 — our look at the top 3 things on our mind here at Alaskans for Sustainable Budgets — for the week of January 27, 2025.
This week, our top 3 issues are these: 1) Senator Dunbar asks the right question about ENSTAR’s most recent Cook Inlet proposal, and by the way, where are Chugach, MEA … and Marathon (2:11), 2) Alaska is already sitting in a massive fiscal hole, but rather than working to repair it, the Alaska House Majority is proposing to make it even deeper (16:53), and 3) we explain the real Permanent Fund crisis — the Permanent Fund Corporation is so mismanaging the Fund that it isn’t earning enough even to cover the POMV draw (37:31).
The Weekly Top 3 is a regular weekly segment on The Michael Dukes Show. The Show broadcasts on Facebook and YouTubeLive as well as via streaming audio from the Show’s website weekdays from 6–8am. We join Michael weekly in the first hour of Tuesday’s show, from 6:25–7am, for a discussion between the two of us about our three issues.
Hi, this is Brad Keithley, managing Director of Alaskans for Sustainable Budgets. Welcome to the weekly top three the top three things on our mind here at Alaskans for Sustainable Budgets for the week of January 27th 2025. The weekly top three is a regular segment on the Michael Duke Show. The show broadcasts on both Facebook Live and YouTube Live as well as via streaming audio from the show's website. Weekdays from 6 to 8 am. I join Michael weekly in the first hour of Tuesday's show from 6.10 to 7 am for a discussion between the two of us about our three issues. We post the podcast of our discussion following the show on the Alaskans for Sustainable Budgets Facebook, youtube, soundcloud, spotify and Substack pages, also on the Alaskans for Sustainable Budgets website, as well as the projects page on national blog site mediumcom. You can find past episodes of the weekly top three also at the same locations. Keep in mind that, in addition to these podcasts during the week, you can also follow and participate in the discussion with us of these and other issues affecting Alaska's fiscal and economic condition by following us on the Alaskans for Sustainable Budgets Facebook page and through our posts on Twitter. This week, our top three issues are these First, senator Dunbar asked the right question about NSTAR's Cook Inlet proposal.
Speaker 1:And, by the way, where are Chugach, mea and Marathon? Second, alaska is already sitting in a massive fiscal hole, but rather than working on it, the Alaska House majority is proposing to make it even deeper. And third, we explained the real permanent fund crisis. The Permanent Fund Corporation is so mismanaging the fund that it isn't earning enough even to cover the pomv draw. And now let's join michael let's get started.
Speaker 2:We've got quite a bit to go over today and there's a lot of stuff that I want to touch on here. So first things first. We saw the thing about the lawsuit with nSTAR and Hillcorp and everything else, but somebody at least seems to be asking the right questions of Chugach Electric MEA and, I guess, maybe NSTAR. Let's start with that.
Speaker 1:Last week NSTAR's presentation about where things are and their pitch for why their deal, their new deal with Glen Farn, is a great thing and will solve all of the Cook Inland's problems. During the course of the presentation, senator Giesel asked a question of John Sims who was presenting for NSTAR. That was sort of a puff question. The question was do you perceive any conflicts between Glenn Farn doing the deal with NSTAR and Glenn Farn also being the one in the contractual relationship with AGDC to do the big line down from the North Slope? And Sims, you know, sort of swatted that one away and said no, there's no conflicts. I mean the Glen Farns got a separate deal with us and we're convinced they're going to go through with our deal separate, apart from whatever happens with the pipeline coming down from the slope, their deal with AGDC on the pipeline, that coming down from the slope. And then Senator Dunbar asked the question that I think is one of the key questions that we need to keep asking in the course of looking at what NSTAR is proposing to do and looking at what in the course of what AGDC is proposed to do. Senator Dunbar said let's go back to this question that Senator Giesel asked and he said last year he laid the foundation this way. He said last year we got into this deal with Hillcorp where members of the Senate proposed a bill that would that would levelize Hillcorp's corporate income tax, levelize Hill Corp's corporate income tax, that would bring it up to the level that BP paid and the level that the other producers on the North Slope are paying, essentially close the Hill Corp loophole, all related to essentially North Slope operations. But Hill Corp responded. Senator Dunbar continuing. Hill Corp responded by saying hey, you tax me, you close that loophole and you make me pay what everybody else is paying. And guess what? I'll probably retaliate, said Hillcorp. I'll probably retaliate the Cook Inlet by lowering my investment in the Cook Inlet. And if you guys go high and dry down in the Cook Inlet you have only yourselves to blame because you took that money out of my hide on the North Slope, that surplus, that windfall that we were getting on the North Slope. You took it out of my hide and so I took it out of your hide by reducing investment in the Cook Inlet.
Speaker 1:And then Dunbar continued. He said so what's to prevent, since we have this dual relationship with Glen Farn now between the Cook Inlet and the North Slope. What's to prevent Glen Farn at some point from coming to the legislature and saying, hey, I need an extra $100 million or $500 million or whatever the amount might be, or I need this waiver or that waiver, or I need this exception or that exception, or I need this reduction in property tax, or I need that reduction in property tax to make my project economic. And if you don't do that, maybe I don't have the money to go forward with the Cook Inlet Facility I promised to do with NSTAR. Maybe I have to reduce my investment there.
Speaker 1:What's to prevent Glenfarn from doing the very same thing that Hillcorp did with us last year? And Sins' answer was you know, as you would expect when you're not expecting the question, it was a little bit of a stumble. And then, oh well, we have a direct contractual relationship with Glenfarn and they've committed to go through with it. And you, oh well, we have a direct contractual relationship with Glenfarm and they've committed to go through with it and we don't have to worry about that. It's all separate and apart.
Speaker 1:Yeah, me worry. But here's the deal the NSTAR contract with Hillcorp and with the Cook Inlet Utilities are all separate and apart and Hillcorp has an obligation under those contracts, in good faith and fair dealing, to make investments when it needs to do so in order to make deliveries under those contracts. Yet Hillcorp was threatening that contract, those contracts, essentially unrelated contracts by saying we'd underinvest and, you know, maybe delay our investment or delay whatever we would do. It's exactly the same thing. Dunbar hit on a key question about these inner ties that we're developing with Glenfarm. This you know, low cap, small cap, low cap, small cap, inexperienced company we've got out of New York that we've entered into these various relationships with. Dunbar hit on the key question and it's a question that we need to probe a lot. So, for example, the deal with AGDC and Glenn Farn is dependent on the legislature appropriating $50 million to ADA. So ADA can underwrite the initial FID work that needs to be done to bring the big line project up to the point where you can make the FID decision and AIDA has agreed to underwrite that by $50 million. But they need the legislature to appropriate the $50 million. So what's to prevent Grundfarm from saying, hey, you know you want us to go forward with NSTAR. Your Cook Inlet life now depends on this deal we've got with NSTAR. You know we need that $50 million appropriated to ADA so that we have. You know we have the amount underwritten for us.
Speaker 1:What's to prevent Glen Farn down the road from saying you know that dock that we've got to build both for our facility, both for the big line facility and for NSTAR's in-state facility Hmm, you facility. Maybe we don't have the money to go forward with that doc, unless you do. X, y and Z. There are shared facilities contemplated in this deal between Glen Farn and NSTAR and Glen Farn AGDC and those shared facilities have got to be built in order for NSTAR's deal to go forward. So I think Senator Dunbar just hit on it shared facilities have got to be built in order for m star's deal to go forward. So I I think senator dunbar just hit on it, hit a huge question that I think really you know the rca and others need to dig into to really understand you know what, what we're doing, what alaska is doing by tying its future, both its cook emmett future and its north slope uh, to glen farm well, there's a history of this, right.
Speaker 2:right, brad. I mean there's been a history over the years, over the decades, of oil companies kind of, at some point or another, kind of holding the state over the barrel and say, well, you could do that, but it'd be a shame if something like this happened, and we've seen it. Arco, bp, conoco, they've all at one point or another kind of done a little bit of corporate blackmail on some of those things, simply because we are in a stranded position. We are in a kind of a weak negotiating position at some time for certain things, and so this is something that's happened before.
Speaker 1:Yep, exactly right. I mean ACES. We had when ACES was, and I think this was an appropriate market response. But when ACES was the tax structure, the big three on the North Slope essentially said we're not going to invest under the economic structure of ACES. You want additional production, you want additional exploration, Then you need to change the tax structure. We're going to do that and the state ultimately did that and we got the additional investment, but we can be held over a barrel ultimately did that and we got the additional investment, but but we can be held over a barrel. And the problem is we're tying again, just like has happened with Hillcorp. We're tying the North slope to the Cook Inlet and Alaska is very feels very vulnerable with respect to the Cook Inlet right now. So we're we're giving Glen Farn a tremendous amount of leverage Go ahead.
Speaker 1:Well, this raises one other question, and maybe, maybe I don't have enough time for it, but there's a question of NSTAR presented. But where's Chugach, where's MEA and where's Marathon? Chugach and MEA have contracts that expire before NSTAR's. The Glen Farn deal. The NSTAR-Glen Farn deal is timed to meet NSTAR's obligations and needs. But where's MEA and Shoe Gatch in all this? Are we leaving them behind and Marathon? The final question on Marathon. Marathon has an existing LNG facility that is certificated by the FERC to receive gas to act as an import facility. Separate and apart from Glenfarm Don't need it. We have an existing facility. So where are they in this equation? Why aren't we pursuing that opportunity instead of trying to do this new, this new deal on on with new builds with that are intertied with AGDC's project? Why are we? Why aren't we pursuing the existing facilities?
Speaker 2:Because we're already halfway there with that facility. We don't have to wait on stuff there. Final question here We've only got about two minutes left. We saw that article yesterday talking about now this new lawsuit between NSTAR and Hillcorp, and so I mean you are more familiar with gas contracts and deliveries and storage and everything else. I read into this, like Hillcorp was basically saying we don't like the fact that you're Bogarting gas, even though it's part of the contract and even though it was negotiated. But is this just more flexing on the same, or what is this?
Speaker 1:Yeah, it's flexing by Hillcorp. I mean it's the timing of NSTAR wants to be able to take gas, buy gas from Hillcorp and stick it in the storage. Hillcorp, which runs its own storage facilities, doesn't want NSTAR to do that. If NSTAR needs gas over and above storage then Hillcorp is willing to sell it, but it doesn't want to sell Hillcorp additional gas just to be stuck in storage. And essentially they're trying to. I mean it is Hillcorp again trying to hold NSTAR hostage to modify NSTAR's behavior in a way that maximizes Hillcorp's flexibility and Hillcorp's profits. I'm not. The contract's not entirely clear on the issue. It'll be an interesting lawsuit as it plays out. But it is Hill Corp again trying to exert its control over over the gas side, the gas supply side of the Cook Inlet, to to extract additional concessions out of out of the purchasers.
Speaker 2:All these players trying to maximize their yield and to make somebody else pay. That's essentially, I mean. I think I can summate it that way NSTAR's looking for the state to pay, hillcorp's looking for NSTAR and the state to pay. Everybody's looking for the state to pay in the long run and we're the ones that are going to pay. I just want to. That's spoiler alert foreshadowing. We're the ones that are going to pay in the end, right, brad? That's the end.
Speaker 1:Yeah, that seems to be the case.
Speaker 2:So, brad, yeah, I saw this thing yesterday and I just like man, this saga is just, I can tell that the gloves are about to come off, because they know that the legislature's in session and if they put enough pressure on them they're going to have to do something. And this is going to tie in a little bit to your last one with number three and the and the. You know, stop digging the hole or the deep pockets or whatever. But I mean, this is they're just gonna, they're gonna spend.
Speaker 1:Uh, you could see it already yeah, everybody's going for leverage on everybody else. I mean it's uh. Dunbar is exactly right to to raise the question of whether we're recreating with Glen Farn exactly the same leverage over the Cook Inlet that Hillcorp has been able to develop through its acquisitions in the Cook Inlet and then a BP up on the North Slope. Dunbar raises exactly the right question and I don't think we want to go down that road again. I don't think we want to put the state Cook Inlet in the position where it's dependent on somebody who can then leverage, you know, leverage up their position in the Cook Inlet for, you know, benefits that relate to their, that relate to their slope project and this is why why I raised the question where's Marathon? It's not like. It's not like we don't have alternatives out there. Sims, they previously talked about a floating LNG plant and during his presentation, sims said that that didn't look like it was going to work out because of the tides in the Cook Inlet, because of ice in the Cook Inlet. The concerns about depending upon a floating barge that was regasifying the plant was too great. Those concerns were too great. So we needed an onshore facility. But we're not dependent on Glenfarm for the only onshore facility we possibly can have.
Speaker 1:I went back in the records and Kenai the LNG plant is certificated for imports through 2025, if they if certificated to make the changes necessary to do it and then, once they do it, they have a longer term certificate to operate it, they would have to add the imports for others in addition to Marathon's needs. But that shouldn't be a great big. That shouldn't be a big deal before the FERC. That's an existing facility. We need to make some changes in not huge, but a big deal before the FERC. That's an existing facility we need to make some changes in not huge, but we need to make some changes in. Why aren't we pursuing that instead of this whole new structure out here on land that neither Glen Farn nor NSTAR own and involving new facilities that are joint facilities that would give Lundfarn leverage over Alaska on the Cook Inlet? So Dunbar raised the right question. We need to continue going down that track and make sure we aren't recreating the Hillcourt problem again.
Speaker 2:That's something you'll hear on this program. Dunbar asks the right. Even a stopped clock is right twice a day, you know, even then Dunbar at least did ask. We try and give praise where praise is due, and I guess that is a good question and I'm glad that somebody somebody out there at least asked it. We'll have to see where it goes from here. Brad Keithley, alaskans for Sustainable Budgets, the weekly top three. This is number two of the top three. What do you do when you find yourself in a hole? Right, what do you do? You look up and you're like man, there's daylight is way up there. What's the first thing you do? Well, you stop digging and you find a ladder. The Alaska legislature, apparently, is not figuring that out, brad. They have not stopped digging. In fact they got a bigger shovel.
Speaker 1:They did get a bigger shovel. They're trying to get a bigger shovel. All right, let's go back to last week. Last week we did a segment on Ledge Fin's overview Ledge Finance's overview of the governor's budget in which Ledge Finance analyzed the governor's budget, looked at revenues, looked at projected spending levels and reached the following conclusion. Listeners last week, or listeners that go back and listen to the show, will remember this there was a chart that said 75-25 PFD alone won't balance the budget, that even at 75-25 PFD 25-75, 25 to Alaska citizens, 75% to the government of the POMB, draw to government that alone wouldn't balance the budget. And in the concluding paragraph on that issue said adding those items, certain items to reflect the K-12 match just sort of bringing K-12 back up to where it was last year Medicaid adding those items which represent costs necessary to maintain state services at the same level as FY25, just holding FY26 equal to FY25 in terms of services would result in a substantial deficit in FY26, even with a 75-25 PFD appropriation to balance the budget. This is just to hold equal to FY25 service levels. To balance the budget the legislature will need to reduce spending, pass legislation to increase revenue further, reduce the PFD or draw from savings just to hold equal to FY25 levels. Even POMB 2575 isn't enough to do it. The line of sand that Burt and Lyman and others have drawn in, the Senate said we're not going to go below POMB 2575. That wouldn't be enough to balance the budget.
Speaker 1:On the heels of that, what are the headlines this week? Headlines this week is Alaska House to expedite consideration of education funding increase. The increase would increase Alaska public school funding by more than 35%. The bill would add roughly $464.5 billion to the state's annual education spending, which currently hovers around $1.2 billion per year to Alaska schools. It would increase it by more than a third. So last week we have Ledgefin come out with the overview that says we can't even affordited consideration to that would add roughly a half a billion dollars to the state's education spending. And and there's no mention in any of the discussion that the house did of how the hell they're going to pay for it on long term.
Speaker 2:yeah, the house didn't talk about it, but the senate previewed this here the week before when joseph quoted well, yeah, we're probably going to have to pay for this out of the PFD. There's going to be more PFD cuts. I mean, you know it's coming, you know that's where it's going.
Speaker 1:That's where they're drawing. It's not the right line. The right line either ought to be current statutory or it ought to be POMV 50-50. But they've told us they're going to draw the line at 75-25. Can't even pay for FY26 spending levels that are necessary to equal FY25 service levels. Can't even pay at that level. And now the House is throwing a half a billion dollars on top of it.
Speaker 1:Look, there's a fiscal rule. There are fiscal rules out there. It's sort of like GAAP, it's sort of like generally accepted accounting principles. Well, there are generally accepted fiscal rules and generally accepted fiscal rules are that when you propose a massive increase in spending, you propose at the same time how you're going to pay for it and you discuss how you're going to pay for it and you put in the legislation necessary companion legislation necessary to pay for it. House has gone completely rogue in terms of that fiscal rule. They're just out there on their own proposing these increases. When you are in a hole, you stop and you figure out how you're going to get yourself out of the hole. You're going to figure out how you're going to fill in the hole. You figure out how you're going to get a ladder. You figure out where you are and what it takes to correct the situation you put yourself in. The Alaska house is saying, oh hell, no, we're not doing that, we're just going to go deeper.
Speaker 2:And this is just the beginning, brad. This is just the education component. Then we have the defined benefits component, which is another $50, $60, $80 million a year. Then we have whatever they're going to do with the gas and the Cook Inlet which we were just talking about in segment one, which could be I don't know, you know millions of dollars in the long run. Oh, and we've got the new negotiations for the new contracts which are coming up for the employees as well. I mean, this is just you know. This is like one more feather, only one thin wafer, before we just you know explode everywhere because they just don't care. At this point. It's just like the, you know, the rules are made up and the facts don't count.
Speaker 1:Yeah Well, the rules are ignored. I mean, I have a lot of respect for Alexi Painter, who's the director of legislative finance. I'm not quite sure how he's going to address the issue when someone asks him, as surely someone's going to. How do you square up the fact we can't even afford FY26 with the fact that some in the legislature are wanting to pour more and more and more and more and more money into things without proposing offsetting revenues to pay-fors it's what they're called at the federal level without proposing pay-fors to offset it, to pay for pay-fors it's what they're called at the federal level without proposing pay-fors to offset it, to pay for it? And I don't know what Alexei's going to say. I mean, alexei's going to have to repeat essentially what he said in the overview, which is to balance the budget.
Speaker 1:To balance an even greater budget, the legislature will need to reduce spending even further, pass legislation to increase revenue even more further, reduce the PFD even further or draw from savings. Except we don't have savings. So Alaska needs to stop and take a breath and say look, we've gotten ourselves in a hole. We need to figure out how to get ourselves out of this hole equitably and with low impact on the Alaska economy and we just need to devote a session or we need to devote a committee, or we need to devote something to getting ourselves back out of the hole.
Speaker 1:The Ledgefin summary Ledgefin finance summary ought to be taken as a wake-up call of how deep a hole we've now gotten ourselves into, and we ought to devote a session to getting ourselves out of that hole. Instead of that, we got the House just wanting to make it worse and worse and worse and worse and worse and worse. So it's a hugely concerning situation that the House is proposing something like this. It's a hugely concerning situation. They're not following generally accepted fiscal rules of offering what the pay-fors are going to be, explaining what the pay-fors are going to be to offset the spending that they're proposing.
Speaker 2:So I mean, and you're saying that the House is run amok, but you said the Senate wants to hold the line. But again, going back to what they had said just last week as maybe Burt, maybe Burt, maybe Lyman, but that's not everybody Again Josephson was quoted as saying you know, we're going to take it out of the PFD. So and who's running the? Who's running the Senate right now? I mean, it's a bipartisan coalition, but the Democrats outnumber the Republicans by a significant amount and a lot of those Republicans seem to be real cozy with the Democratic ideology. As far as spend, spend, spend, do you think they're going to be able to hold the line? You?
Speaker 1:know? The answer is I don't know. And and here's, here's a very subtle thing that happened in the Senate organization, the, the significance of which you know may become more apparent as we go along. Burt has has historically been, for the last several sessions, last several legislatures, has been the co-chairman of Senate Finance for the operating budget, for the big spend side, before he got exiled. That's right. And in this legislature he's been pushed over to co-chair for the capital budget. Lyman has become co-chair of Senate Finance for the operating budget. Burt has, you know, they both have round heels in terms of they'll, you know, rock back and give and give, and give and give. But Burt tends to draw the line at a point before Lyman. Lyman tends to have rounder heels than Burt does. Burt last year drew the line at the defined benefits and that's one of the reasons he's been exiled over to the. He's been moved over to the capital budget.
Speaker 1:So as these things start to play out, the person setting the agenda on the Senate side is not going to be Burt. He's on the committee, he will have a voice, he will articulate his concerns, but it's not going to be Burt setting the agenda. It's going to be Lyman setting the agenda and another moderating factor in Senate finance is Donnie Olson. Donnie is co-chair for bills the running bills that don't relate directly to the operating budget or the capital budget, and Donnie's been somewhat of a voice for the PFD. I mean he represents a district that has lower economics than other parts of Alaska and has been more sensitive to the, to the PFD.
Speaker 1:But Donnie's now in the hospital for a for an unknown period, possibly an extended period, right? So you have Donnie off the committee, you have Bert pushed down to capital budgets or pushed over to capital budgets. You have Lyman running the committee. It'll be interesting to see how that, how that plays out, if that has an effect. Lyman in the past has been one of those who talked about 75-25 being the line in the sand, but Lyman's been known to erase lines in the sand as he goes. So that little detail, that little organizational change, may play a factor in this as well.
Speaker 2:Yeah, no, it's interesting to watch and the fact that they've been kind of sidelined shows you the direction they're going. I mean, I'm not confident that they're going to be able to hold back. You know what I mean. Again, we'll give praise where praise is due. Stedman did he held back the defined benefits package last year. He was the big, major stumbling block in the Senate to get it out of there although it did end up actually coming out and then dying in the House. But he at least tried to do that and spoke very, very strongly against it. And now he's just not going to have that, he's not going to have that horsepower. And so 75, 25? No problem, you did the math on this. What is it like? 81, 19, something like that this year, something like that.
Speaker 1:Yeah, and that's before adding $400 million. I mean, $400 million is going to take it to like I'm doing this week's column on it, but I haven't done the calculations yet, so it's going to take something like 92.8.
Speaker 2:92.8, yeah. So I mean again, I was predicting this earlier. Everybody was saying earlier last year people were saying doom and gloom. I said it'll be 24 to 36 months before they exhaust the permanent fund and people were like, oh no, that's too soon. I think it'll be five or six years. But if they add a half a billion dollars in spending, yeah, it's pretty much going to be gone in 24 to 36 months because that increase just continues, especially if they lock that education increase into the BSA, where it's in perpetuity. That's it, it's in perpetuity and they peg it to the consumer price index.
Speaker 1:Yeah, and think about the irony of this. We're talking about the argument that we want to raise this spending level because we want to improve the education for working Alaska families. We're not concerned about higher income families. We want to raise the for the 80 percent of working Alaska families. Well, who are they? Who are they hurting to pay for this? If they, if they, if they cut the PFD, they're taking it out of the very, out of the pockets of the very people they claim to be helping. They're not spreading it across across a broad base. They're not including there.
Speaker 1:There was a, there was an op ed that just blew my mind. There was an op-ed in the ADN by two people in the oil industry saying how important education was to the oil industry retaining the oil industry in Alaska, and how important it was that we have an increased K-12 funding to help out the oil industry in Alaska. Well, the oil industry isn't paying for any of the increased costs, so they claim a benefit, they claim it's important to them, but I guess it's only important if somebody else pays for it, if middle and lower income Alaskans pay for it. So the irony of this is just huge. We want to help you. We're from the government. We want to help you here. Give us your money out of your pocket so we can spend it to help you.
Speaker 2:I mean, we've been talking about that, the ICER, the initial ICER report that it was the worst thing that they could possibly do for 10 years. 2014 is when we first started talking about it. And here we are, 10, going on 11 years now, still watching the same thing happen over and over and over again. Let me go back and answer this question. So John says just to, to be clear, of all revenues, the state gets 75% off. The top 25 goes to the PFD. The PFD pays a dividend of about 5% supposed to be 50-50, but a four of the state.
Speaker 2:No, you have it wrong, john. So what happens is 25% of the royalty revenues goes into the permanent fund, right off the top, and then it rolls in there and the earnings spin off every year. And then what was supposed to happen was that we were supposed to be paid on a five-year rolling average of those earnings, but they stopped that with the POMV, which means the government takes 5% of the earnings every year, earnings every year and then was supposed to, according to Hammond, split those 5% that they roll out every year 50-50 with us, the people, and split it out for the PFD for 50% and state spending for the 50%. But what's happened is they're now taking 75% of that money and it's going towards 90% of that money, leaving us with whatever crumbs we can pick up with our sticky little fingers on the plate, because that's all that's going to be left over is the crumbs at this point.
Speaker 1:So that's how it works, and we're just talking about the POMV revenue. I mean, the state gets all of the production tax revenue, gets all of the additional fees and taxes.
Speaker 2:And 75 percent of the royalty right off the top, it's only the 25 that gets deposited, and they want that and more so. It's basically like they handed you a plate that's with a full cake and then said, and you go to take a piece and they're like no, no wait. And then they eat all of the cake except for that one bite left and they say, okay, you can have that, but we're still kind of hungry, so maybe we'll too. I mean that's, that's what it is, that's. I mean you know. And again, no thoughts. No, look at fiscal discipline, no, look at anything else. I mean their own reports from their own people at Ledge Finance say you just can't do that, even to get to this spending level. And their first reaction is to well, let's increase it half a billion dollars a year. Right, I mean let's. Let's increase it half a billion dollars a year.
Speaker 2:The greed and the entitlement is astounding to me. I just don't fathom it. I mean, they said that was us. By the way, that was, she was talking about us, not about the legislature. She was talking about how greedy we were, that we dared to want our PFD, which I just I again, I don't think it's, I don't think it's going anywhere. Man, I don't know about you guys, but I just I think we're going to, I think the PFD will be gone. And then what'll happen, Brad? They'll come back to us and go free rides. Die hard, sweetheart.
Speaker 1:Right. Well, no Michael, no Michael, we may hit this in the next segment. What they will come back and say is we need to combine the earnings reserve and the corpus of the permanent fund so we can continue to draw even though the permanent fund isn't earning the return that it needs to pay for the draw. We need to combine the two and continue to draw and in that fashion, through that step, open the door to starting to drain the permanent fund to continue to fund government without the top 20% or non-resident industries or the oil companies having to pay a dime toward the additional costs. So the next attack really is being set up now through this proposal to consolidate the earnings reserve in the corpus of the-.
Speaker 2:Which we saw last year and we warned about last year. We said this is the danger zone, Danger zone. This is what's happening right there. You're going to drop us into the danger zone where you're going to eat the seed corn out of a PFD or out of the permanent fund itself, and of course there will be no PFD and they'll just start tapping into the permanent fund harder and harder and next thing you know, there is no more permanent fund either.
Speaker 1:And what's the constituency? What's going to be the constituency to save the permanent fund at that point? People talk about, well, it's there for future generations. We shouldn't tap it for future generations. But we've seen with the PFD, we've seen with the CBR, we've seen with the SBR, we've seen how far that argument goes. It's no, no, I need it now. I need it now for my spending and I don't want to tax the top 40% and non-residents in the oil companies because they might say no, they wouldn't pay that stuff, they'd push back on it. I need it now for my spending. So you know, I'll just take it, I'll just start, you know, making these rules about how I get into the permanent fund to start taking it down. And it's there. You know it's there for future generations. We're a future generation now and so we're going to start covering it that way. That's where we're going to go.
Speaker 2:That's the direction that they're trying to set up. Well, and I mean, there's just no, there's no fiscal discipline in sight. There's very few people who are even asking the question about who pays and how does this get done, and what happens to the future. Nobody seems to be thinking about that or talking about that in any of the discussions. As long as the government employees are taken care of, we're okay, just calm down. As long as the government employees are taken care of, it'll all be fine. Don't worry about it, forget about everybody else.
Speaker 2:So, yeah, well, brad, I don't know, sometimes these Tuesday meetings between you and me, I mean I got to be honest, I come away just a little bit depressed, more depressed than I started out, because I would. I just can't believe that this is the direction we're still going, with all these warning signs and everything else. And, like you said, it looks like this is all a setup for number three, which is the real danger to not just the PFD, the permanent fund dividend but to the permanent fund itself. We've talked about this. But all the things that are lining up right now, this extra spending, the disregard for where the PFD goes, the disregard for how we pay for it it all seems like it's setting it up for one big final throw of the dice when it comes to the real permanent fund crisis.
Speaker 1:Yeah. So there was a forum, a conference, a seminar held earlier this month jointly sponsored by Alaska Common Ground, the Institute of the North and Commonwealth North all of the so-called thought leaders at least top 20% thought leaders in the state and the subject of it was excuse me, the subject of it was protecting the permanent fund, a rules-based permanent fund endowment model, and I listened to it, I watched it and basically it was a pep rally for this proposal to consolidate the earnings reserve into the corpus and have the draw, the POMV draw, come from that single fund. The reason they're doing it is because the earnings reserve is running down and they're concerned that there's not going to be enough in the earnings reserve to cover the POMV draw. So they want to consolidate the two funds together in order to continue the draw, sort of regardless of how the earnings are coming out and if necessary or not, or just as a matter, they can take money from the corpus in order to cover the POMB draw. The conference turned in to be a pep rally for that proposal. The claim is that there's a crisis, that not having the two funds consolidated is a crisis because we won't have enough money to cover the POMV draw. But it's a self-created crisis. We've been through this on previous segments. I've written columns about it.
Speaker 1:The reason the earnings reserve is low is because the legislature took $8 billion out of the earnings reserve and that's about a three-year, two or three-year piece of, or coverage of, the POMB draw. It took $8 billion out of the earnings reserve and moved it over to the corpus and at the time they said this was a prepayment for inflation proofing, so we don't need to inflation proof. In subsequent years We'll have. We've already prepaid enough for the inflation proofing. Well, the Permanent Fund Corporation accounted for it that way for about a year and then the Permanent Fund Corporation dropped the footnote that said it's a prepayment for inflation proofing and just took it and said it's part of the corpus now and it's not in the earnings reserve anymore. It's not a prepayment for anything that should come out of the earnings reserve, it's just ours. Now it's in the earnings reserve anymore. It's not a prepayment for anything that should come out of the earnings reserve, it's just ours. Now it's in the corporate space. And they've created this crisis, this so-called crisis in the earnings reserve, by draining the earnings reserve through that $8 billion transfer. And now, all of a sudden people are saying, oh my gosh, there's not enough in the earnings reserve. Well, that's because it was supposed to be a prepayment. It was supposed to be, so you didn't have to pay as much out of the earnings reserve going forward. But now that they've forgotten that all of a sudden, yeah, we have to pay inflation proofing out of the earnings reserve and now we're draining the earnings reserve. So it's a self-created crisis, but it's being used as a justification for merging the two funds together in order to allow the clawback or the breakdown of the permanent fund corpus.
Speaker 1:I went in at the urging of some others. I went in and spent quite a bit of time understanding the earnings the earnings side of the permanent fund and how we're earning and the level at which we're earning and what the investments are producing. And I discovered something that I wrote in last week's column we aren't earning anything off the permanent fund After you take into account the difference between we've got a benchmark that we call a passive index benchmark and the permanent fund is an actively managed fund. That means we've got advisors and we've got people that work on it. We've got people that decide to make investments. They make investments in private funds rather than follow an index like the S&P 500 index or the NASDAQ or the Dow Jones or one of the common indices out there. Rather than do that, we got a bunch of people who are working on deciding where these investments go and you realize after you run the numbers that the level of money we're spending on the fees for this active management, which is about $800 million a year about 1% of the fund the level of money we're spending on the fees is greater than the amount of additional benefit we're getting out of actively managing the fund as opposed to just relying on the benchmark. Yeah, you've got to chart up the yellow. The column in yellow is the amount of additional benefit that the permanent fund has earned through this active management, the amount of benefit we've gotten through active management over what we would have got if we just would have invested it in the passive index. And it shows that for the years from 2017 through 2022, we got some benefit of it. But then we look at the fees that we've paid for that benefit and 2% again in 2018, negative 0.1% in 2019 after fees fees. We've paid the difference in the return that the fees have produced compared to what we would have gotten if we just would have stuck them in indices.
Speaker 1:The problem with the fund is not this whole mishmash that's going, this contrived mishmash that's going on in the earnings reserve. The problem with the fund is it's not earning enough. It's not earning what it would earn even if we just put it. Stop the fees, stop the payments, stop the $800 million a year and put the money into the passive indices, into the index benchmarks that are out there. If we just invested the money that way, just put the money into these indices, we would make more than we're making by trying to actively manage the fund and paying all these fees.
Speaker 1:We're underwater. We're losing money by not using the passive indices and trying to actively manage the fund. Basically, what we're doing is for a while we were making enough to pay the fees, just to pay the fees, to continue to fund the bureaucracy that the permanent fund corporation has become. But in the last three years we haven't even done that. We haven't even made enough out of the earnings to out of the permanent fund investments to cover the fees. So it's the problem here. Yeah, the problem here is not the lack of combination of the accounts. The problem here is the lack of earnings.
Speaker 2:And the lack of fiscal discipline. Right, I mean, that's really the core problem here is the lack of fiscal discipline, which has led us to this, which I've been saying since 1999. The goal is to get their hands on the corpus of the permanent fund, and I'd be interested to see if they use some Bill Walker math in that big meeting with all the think tank people, because that was his argument too back in the day. There's just not enough money. Of course they didn't account for any of the money they got added in, right, I remember that was the bill walker thing. Look, there's not enough money in the earnings reserve. Here's what we're going to keep drawing it down and we're going to zero it out.
Speaker 2:Of course, the math that they put up on the big chart did not account for any of the money that would be deposited over the next. You know however many, however many number of years it was. It was just as if that account was static and they just kept drawing from it and there was no more deposits. I mean that was Bill Walker math. It was just totally fallacious, but it looked. I mean it was true, but again, only if you didn't account for the deposits that would go in each year, and so it was totally misleading.
Speaker 1:Yeah, and here's the. Here's the problem now, michael. They aren't even making enough in the earnings. They aren't even making enough off the permanent fund to, even if they accounted for those numbers, even if they accounted for their earnings, they aren't making enough to fund the earnings, the POMV draw that the legislature is making. The real problem, the real reason that the legislature wants to consolidate the two accounts in part is because of that $8 billion. But it's also because they look down the road and they see the permanent fund is not producing enough earnings even to generate the 5% take that the POMB statute calls for.
Speaker 1:The permanent fund is not generating enough earnings to cover that 5% draw, particularly after you take into account the management fees. I mean the management fees are double as a percent of the fund. They're double what the you know, the Bellwether Norway fund pays. Norway pays about, you know, a half a percent in fees or four-tenths of a percent in fees. We're paying eight-tenths, nine-tenths of a percent in fees and after the fees we're not earning enough to be able to cover those POMV draws. So the real problem here, the long-term problem, is the permanent fund corporation has become a bureaucracy that is just earning enough to pay itself to pay all the management fees it's incurring. It's not producing the level of returns. The state needs to continue to fund the POMV drop. So those who think long-term are saying great, okay, we need to consolidate the accounts so we can start pulling from the corpus.
Speaker 2:We can start funding current operations from the corpus, which is a self-licking ice cream cone. I mean, can't they see the danger in that, or do they just not care? They don't care.
Speaker 1:This is all about funding my spending now, funding my government unions, funding the programs that make me look like a giant in the legislature, make me look like God because I can fund these programs. All they care about is funding their programs now. They don't care about the long term. Bert will tell you he cares, bert who's a proponent of consolidating the two accounts. They'll tell you that they are concerned about the future, but they're not.
Speaker 1:If they were concerned about the future, they'd keep the earnings reserve as what one of my friends calls a speed bump, a barrier that you can't get to the corpus because you have to go through the earnings reserve. And if the earnings reserve doesn't have enough money in it, then you got to figure out what you're going to do, as opposed to being able to attack the corpus. Um, now they're trying to do away with that speed bump. They're trying to do away with that barrier and say, look, if we don't earn enough, you know if, if the permanent fund corporation gives away all this money in in management fees 800 million dollars a year in management fees if the earnings return, if the PFD gives away or the permit fund gives away all that money, okay, fine, they've got their own bureaucracy they need to fund. We'll just go attack the corpus. Set us up, we can go attack the corpus.
Speaker 2:Well, we've talked about for years how the legislature has always been good about kicking the can down the road, and we were talking about eventually you run out of road and you have to face the hard facts. But what they've done here is they're going to try and murder Alaska's financial future and pave it with its dead body and put it out there to give themselves just a little bit more road to kick the can down before they completely run it out of money.
Speaker 1:Yeah, it's, it's. I mean, first they came for the SBR the statutory budget reserve, Then they came for the CBR. First they came for the SBR the statutory budget reserve, Then they came for the CBR, Then they came for the PFD, started cutting the PFD and now, as the PFD is winding down, they're saying wait, we got to go someplace else. We can't tax the top 20% non-resident industries and the oil companies. We got to go someplace else. So we'll merge these two accounts and open the door in that way, open the door to going after the corpus. That's exactly what's going on here. So when we say what's going to happen when the PFD runs out, there are people thinking about that and they're thinking about great, we'll set up the ability to raid the permanent fund corpus at that point.
Speaker 2:And we have been screaming about this for years and and saying this is where they were going, this is the direction they're going, and nobody's listening. People just keep electing them. Oh, we're going to put a chicken in every pot.
Speaker 1:That's because. That's because people are electing them based upon the chickens, their current chickens. I want my spending now. You know what? What? Alaska turns over a third of its population every whatever, whatever number of years. They want it, they want it in their pot Now. They're not concerned about the future because you know, in the future they're going to be in Texas or Florida or or South Carolina or Calgary. Wherever they're going to be, we want it in our pot Now. We want Johnny educated now. I mean, this goes back. This goes back to the early 20 teams when we talked about, you know, the astroturf football fields all over the state. I want my johnny to play on an astroturf football field, just like he would play off and play on in in texas if he was down there. I and yeah, yeah, it takes money out of the out of the budget to do that, but that's what I want.
Speaker 2:I think Bill speaks for us all, Brad. He says thank you, Brad. Another Tuesday that I'm mad as hell and can't do anything about it. That's kind of frustrating, but that's where we're at, we know, we can see where it's going and it's a painful, painful thing. In Alaska, says Senator Myers, politicians are elected based on what they can spend, not what they can save. Yeah, I mean, I guess that's been proven over and over and over again. All right, Brad, we are out of time. We got to go. Thank you so much. I see Dwayne is in the green room getting ready to join us here for hour two. Thanks, I think, Brad, for coming on board. Michael, thanks for having me. It's always good to talk with you, my friend. Thank you so much.
Speaker 1:Well, that's a wrap for another week's edition of the Weekly Top Three from Alaskans for Sustainable Budgets. Thank you again for joining us. Remember that you can find past episodes on our YouTube, SoundCloud, Spotify and Substack pages, and keep track of us during the week on Facebook and Twitter. This has been Brad Keithley, Managing Director of Alaskans for Sustainable Budgets. We look forward to you joining us again next week for the next edition of the Weekly top three.
