The Weekly Top 3
The Weekly Top 3
The Weekly Top 3 (3.17.2025)
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 March 17, 2025.
This week, our top 3 issues are these: 1) we explain how the Permanent Fund Corporation is leaving substantial amounts of money on the table (1:59); 2) we look at what both the left and right are missing about the Hilcorp loophole (19:54); and 3) we discuss how the Senate is being pushed this session to act as the fiscal grown-up in the room (38:42).
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 March 17th 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.
Speaker 1: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.
Speaker 1:This week, our top three issues are these First, we explain how the Permanent Fund Corporation is leaving substantial amounts of money on the table. Second, we look at what both the left and the right are missing about the Hillcorp loophole. And third, we discuss how the Senate is being pushed this session to act as the fiscal grown-up in the room. And now let's join Michael.
Speaker 2:All right, brad. Well, let's dive into this. You got some good topics for today and I'm looking forward to it. The first one is we talked a little bit about this last week, but you dove a bit deeper into this in your weekly column, talking about exactly how much money are we leaving on the table with the PF, the Permanent Fund Corporation, and the POMV draw? You've got some questions, so hit me with it here.
Speaker 1:So last week we talked about the permanent fund balances, what the permanent fund balances would have been had the permanent fund been invested in S&P 500, in the S&P 500 index, through an electronic traded fund, into the S&P 500 index, and the numbers were surprising. I went back to 2020 and it showed that in every year except one, the S&P would have produced significantly higher returns for the permanent fund as opposed to how the permanent fund, as opposed to how the permanent fund corporation had invested the funds, and that the balance for the permanent fund would be significantly higher today, even starting in 2020, would be significantly higher today, nearly double what the balance of the permanent fund is had it been invested. Over the course of the week I kept thinking about that and I got several questions about well, what does that mean in terms of money? What does that mean in terms of the POMV draw? What does that mean in terms of how much the Alaska revenue side would realize had the permanent fund corporation invested the funds differently? And so I dug into that and I went back to FY13, because the way you calculate the POMV draw is it's the average of the first five of the preceding six. It makes sense if you think about it, the first five of the preceding six years, the average permanent fund balance. And so you can't just start in say you just can't start recalculating in, say 2019 and know what the 2019 POMV draw was would have been under alternative investment. You have to go back to FY13, actually to be able to do that to July 1st 2012, to be able to do that calculation. So I did that.
Speaker 1:I went back to July 1, 2012, and looked at what the permanent fund would have looked like had it been invested in S&P or the S&P 500 or some variation of the S&P 500, a 90-10, the Buffett rule for investment, 90% in the S&P 500, 10% in bonds had it been invested in those. And the numbers are just flooring. I talk about them in last week's landmine column for people who want to dig into the details, but the numbers are just jaw dropping. I mean the. So you, you start in. We started in F on July 1st 2012, beginning of FY 13, with the same balance as the permanent fund had, and said, okay, up to then everything's the same, and that balance was about $40 billion, thank you. And that balance was about $40 billion.
Speaker 1:And then we started building the permanent fund through investment in the S&P and there's a publicly traded fund VOO is the trading symbol for the Vanguard S&P 500 fund that tracks the S&P 500 index. And so we said, okay, so what if it had been invested in VOOs, as opposed to the way it was invested? And Michael's got the chart up on the screen. The blue line at the bottom, the line is what the permanent fund did over that period and the red line is what the permanent fund would have done. The permanent fund balances would have been over that period had it been invested in the S&P 500. In only one year did the S&P 500, did the permanent fund outperform through this entire period, through this entire 13-year period? In only one year did the permanent fund outperform the S&P 500. And that was in 2022, fy 2022, when the permanent fund, when the S&P, dropped, but so did the permanent fund, the permanent fund balance just dropped a little bit less.
Speaker 1:But using those balances then, using the balances we constructed out of the S&P, we looked at what the permanent fund draw would have been and that's what the bars are at the bottom of this chart, and the reason they begin in FY19 is because that's when the POMV draw began and that's the period that we can start going back to FY13. That's the period that we can start using the average of the five of the preceding six year balances, and the blue bar is what the POMV draw was from the permanent fund. The red bar is what the permanent fund draw would have been had we been using the S&P 500. And the differences are just stark. I mean, beginning in FY19, the draw, the POMV draw, had we been invested in the S&P 500, the POMV draw would have been $470 million more than the actual POMV draw based upon the permanent fund balances at 17%. Fy20, the difference is $760 million, 25%. The draw would have been 25% higher had we been invested in the S&P 500. Fy21, the draw would have been a billion dollars higher. Just the POMV draw would have been a billion dollars higher in FY21, 35% above what the actual POMV draw was. Fy22, the POMV draw would have been a billion and a half dollars, nearly a billion $600 million higher in FY22, 50% above what the POFD draw. So you go on out and by the time you get to FY26, uh, well, fy25 is a $2.74 billion difference. The POMV draw would have been $6.39 billion versus $3.66 billion. And uh, fy26, the year we're looking at the POMV draw, would be $3.25 billion higher. It would be $7.08 billion versus $3.8 billion, 86% higher.
Speaker 1:So what you figure out from this is the permanent fund corporation has been investing basically to just sort of hold its own. If you look at the blue line, you can see it sort of flat lines across this entire period, while the S&P if it had been invested in the S&P while it climbs substantially. The permanent fund executive director, devin Mitchell, was before Senate Finance and got asked about why didn't you invest in S&P, and the answer basically was volatility that the S&P is more volatile, and that's a significant insight into what's going on in the permanent fund corporation's mind. They're scared of volatility and so they're investing in a way that doesn't have much volatility, doesn't have much variation, and what you're getting out of that is that flat line, the blue flat line, that crosses all those years without much significant growth. They're just sort of holding their own and they're paying something like $860 million.
Speaker 1:This 12-month period just ended, at the end of December. They're paying $860 million in fees basically cover your ass fees to get advisors and managers to build this fund. That doesn't vary much. Well, variability is not a bad thing as long as the variability is generally high, is generally up, and that's what the S&P line is showing you that if you invested in the S&P, yes, it's more variable, which means it changes more year to year, but the volatility has been up, with the exception of one year, and even then has been up, with the exception of one year, and even then, when the S&P corrected down by 10% in FY22, it still stayed significantly higher than the permanent fund corporation level. And this is part of why this number flatlines the Permanent Fund Corporation flatlines.
Speaker 1:Instead of paying $860 million in fees, like the Permanent Fund Corporation is doing, to get managers and advisors to tell you how to avoid volatility, all you would pay in fees for investing in the S&P 500 through VOO, through the Vanguard S&P 500 ETF, all you would pay in fee is 0.03%. And that 0.03% even at the much higher balance that we're showing in FY25 and FY26, that 0.03% would be $50 million in fees compared to the $860 million that the Permanent Fund Corporation has invested. So what I think we've done with the Permanent Fund Corporation is we said look, we want you to be riskless, we want you to take no risk, we want you to keep the fund growing a little bit, but we'll tolerate a loss of return to avoid volatility, and the consequence of that is that we've foregone these higher returns. If you look at FY25, that $2.74 billion difference in the POMV draw would have been more than enough not only to pay a full PFD without really breathing hard, but also to cover additional expenses. Like we're hearing now about deferred maintenance and about additional K-12 spending. We're leaving money on the table.
Speaker 1:The way the Permanent Fund Corporation is managing the Permanent Fund and we've got, to my knowledge we've got no one looking at it. I mean, what you have a revenue commissioner for in government is to look after revenue. He's not supposed to be looking after other things. He's supposed to be looking after revenue. And when you look after revenue, you're supposed to be looking at things like am I getting the full return from oil that we should be getting? Am I getting the full return other places? If I need more revenue, where would be the efficient and equitable way to get more revenue?
Speaker 1:One of the things the revenue commissioner should be looking at is this very thing he should be looking at is the permanent fund corporation producing the kind of returns that we could get off this money? Are they producing the type of POMV draws, the type of revenue generation that we could be getting off this money. To that end, the revenue commissioner sits on the permanent fund board. By statute, the revenue commissioner has a seat on the permanent fund board, but our revenue commissioner has been asleep at the wheel on a number of things, but this is certainly one of them and I think this is just shocking when you look at the revenue being left on the table by the way in which the Permanent Fund Corporation is investing.
Speaker 1:I'll go so far. One more thing. I'll go so far even to say I think this is a 2026 election issue. I think I look at that. I mean, that's $3 billion being left on the table and I think I think somebody in 2026 running on replace the permanent fund board is is going to get a lot of traction when you start talking about the numbers that are that are being left behind.
Speaker 2:Well, and the other thing, of course, that exacerbates this is they keep patching all these rosy projections into what the permanent fund is going to earn and it's not earning. What they're projecting. You know what they're saying is a standard projection, whereas I mean you're talking about. You know, the current $80.46 billion value of the permanent fund and the $188 million value of the Vanguard fund just shows you how far they're, $108 billion apart, after only 10, 12 years. I mean, that's a real problem. And it's not that I want to give more and more money to government, which is what this would have done, but we would at least not be fighting, I think, about some of the things that we're fighting about right now.
Speaker 1:Oh, we wouldn't be fighting about the permanent fund dividend. This would cover the permanent fund dividend, the statutory permanent fund dividend, easily.
Speaker 2:Rob Meyers says in the legislature. We're talking about how the opposite. We're saying the draw rate is too high and encouraging the permanent fund board to invest too aggressively is what they're saying right now. I mean, you wouldn't even have to. Let just invest it. Have one guy going yeah, we'll invest it all in the S&P 500 and we'll just be fine.
Speaker 1:I mean, wow, that's what Nevada does, the Nevada PERS, the public retirement system, their public retirement fund. Down there, they invested in ETFs, they invested in electronic traded funds, the low charge, low fee funds, and they've got a lot of it invested in S&P and they got one guy running it and one person doing the books. That's their entire administrative costs and they're producing returns not as high as this because they don't have it all invested in the S&P 500, but they're producing returns significantly higher than what the permanent fund's returning. I get that people are cautious. I get that people don't want to risk the money and don't want to incur volatility, as if that's a nasty word. I get that, but what it's done is it's leaving money on the table. It's paying a huge amount in fees. I mean we're paying 1% in fees compared to the 0.03% we would be paying using an ETF. We're paying a huge amount in fees and we're getting like zero returns, in fact, or very low returns, in fact. The reason we're having this whole discussion about merging the earnings reserve and that's how I got into this issue the reason we're having this whole discussion about merging the earnings reserve and the permanent fund corpus is because the permanent fund isn't generating enough money, even enough money to cover the 5% POMV draw. And so the sense is oh, we need to merge those two funds so we can start drawing from the corpus, so we can keep the 5% draw going even when the permanent fund is not generating enough in earnings to cover the POMV draw. This would have solved that problem in spades had we been going down this track.
Speaker 1:I've been. I mean, I've got to admit that, like everybody else, I've been one of the ones that has said, oh, we need to manage the permanent fund cautiously. But this isn't in cautiously. Look at the 13 years. Only one year have we had a significant decline in the S&P, and that was more than offset by the growth in the S&P up to that point and the growth in the S&P after that point. So this isn't incautious.
Speaker 1:Yes, it's more volatile in the sense that the variation around the median is more active. But when you have a low volatile fund, when you're not investing for growth, you're just investing to avoid volatility, you get what the blue line is showing. You get this sort of flat line that goes across time. Yeah, you haven't lost much, but you haven't grown it, and the consequence of not growing it is you're not getting the POMB draw. The consequence of not getting the POMB draw is we're cutting the PFD. Instead, we are talking years of foregone deferred maintenance, that that we haven't, that we haven't kept up with. We're talking about K through 12 and we're and we're talking about, we're talking about high fees on the permanent fund. To maintain this sort of steady, non-volatile, flatlined existence, we need to. As I say, I think a 2026 campaign slogan of replace the permanent fund board is going to be something that, if they don't get this under control and I doubt they do, if they don't get this under control something we're going to see in 2026. When you look at these numbers, it's unavoidable.
Speaker 2:Well, and what really hits my attention here is that even with the supposed volatility we're talking about the drop in 22 and things like that I mean the permanent fund lost about $5 billion, just over $5 billion, and the S&P fund lost about $19 billion $19 billion. But overall you'd already made up there was already a $50 billion difference between the two, $60 billion difference. That was again what has still been negligible in the long run, especially with the returns as they are today. We've got to continue here, the weekly top three, brad Keithley, with our Truth Tuesday segment. The big question here is today. The big question here is today.
Speaker 2:I've seen a lot of this hate that's come out for Rob Yunt over this discussion on changing the S-Corp, c-corp, llc designation for oil companies, and there's been a lot of hand-wringing. There's a lot of discontent, I guess I should say, on the right over Rob bringing this up. I for one am fine with it, but there's a lot of folks out there that are doing it. What are the left and the right both missing on this discussion of this Hillcorp? You know the Hillcorp rule, or the loophole, as you call it, for the taxation on oil corporations, brad.
Speaker 1:So, michael, I've been involved in the Alaska oil industry since 1993. And by my calculations that's something like 32 years that I've been in the industry in one way or another, either directly in the industry or, for the last 10 years, sort of monitoring it in terms of numbers and calculations and in terms of the proposals that come before the table. There are several truths, consistencies over that 32-year period. But one of them is that the Alaska revenue system from petroleum is four-pronged One is production, one is royalty. That's been consistent over the entire 32 years. The second is that all producers have paid royalty for production from state lands. The second is that there's been a production tax of varying types over that period but there's been a production tax throughout that period that all producers, regardless of whether it's state or private or federal lands that all producers have paid into. The third is that there's been a petroleum property tax that's shared with the boroughs but the state takes a share of a tax calculated on the property invested in petroleum plant and equipment. And the fourth has been there's been a corporate income tax on petroleum companies consistently across that entire period. It's a four pronged approach and the reason you have a four pronged approach, the reason any tax system has more than one way of calculating, of calculating taxes is is sometimes one of the measures goes way up. When you're in a high investment period, for example, the property tax will go up high. Sometimes, the numbers will go way low. For example, when oil prices drop, the royalty will go way low. Sometimes, because you want to change the petroleum tax, you want to change the incentives. Because you want to change the petroleum tax, you want to change the incentives, as we did with ACES in 2006, 2007,. Rather, and as we did with the current SB21 in 2013. Sometimes, because you want to change the incentives uh, what you're, what you're encouraging producers to do you'll change the petroleum tax, sometimes the, the, the severance tax, and sometimes that'll cause it to go up and sometimes it'll cause to go down. Sometimes it'll cause it to flatline, even though oil prices are going up. Um, and and, and. So you've got. You've got those variations.
Speaker 1:The corporate income tax has always been sort of a net profits share that Alaska has shared in the net profits through the corporate income tax, has shared in the net profits of the corporations operating the petroleum corporations operating in Alaska. It's been consistent since way before 1993, way before I came on the scene but it's been consistent since the time that I've been involved and it is a not insubstantial. This sort of net profits tax is a not insubstantial source of income If you look at. For those who are really interested in this sort of stuff, if you go to the spring revenue forecast and you look at Appendix A3, which has the breakdown of the petroleum revenue by category, you'll see that petroleum corporate income tax is the third largest source of income projected over the last 10 years and projected over the next 10 years. The oil and gas royalties are first, projected over the next 10 years are first. Production tax is second but close behind production tax and in fact even with production tax, if Hillcorp were paying the corporate income tax, even with production tax would be the corporate income tax to get at petroleum revenue in different ways to make sure the state is getting its share of what those petroleum revenues are.
Speaker 1:It's not a new system. It's not something we're trying to apply for the first time. It's not something we're trying to penalize a company with. It's been a basic, fundamental part of the overall petroleum system for the last four years. Now the thing about it is the corporate income tax part, the petroleum corporate income tax part, is built in part on the basic corporate income tax. As a convenience, when they were building the petroleum corporate income tax, they used the basic corporate income tax as a starting point and then built various widgets on that corporate income tax to calculate the petroleum corporate income tax. And so it's built on this. It's built on the corporate income tax in part, but it's not. I mean, when people think about it as a corporate income tax, it's not that. It's the petroleum corporate income tax, it's part of the petroleum revenue system that we've always had in this state.
Speaker 1:And so when I see articles you know complaining about Rob Yunt, about oh, what's the article that just really I mean I almost started laughing at Marcy Sowers. Senator Yunt talks like a tax-loving social justice warrior, not a conservative. When I see articles like that I just break out in laughter. It has nothing to do with social justice warrior, tax-loving social justice. It has nothing to do with that.
Speaker 1:The petroleum corporate income tax as it applies to Hillcorp, in the same way that the damn tax has been there since before 1993, since before I came on the scene it is to make sure that that fourth prong of the petroleum revenue system applies to Hillcorp in the same way that it applies to everybody else, that the revenue the net profit share, if you will from Hillcorp's income in the state is being taken in the same way as being taken from everybody else. It isn't a tax-loving social justice warrior, it's somebody who's trying to restore the system, conservative, who's trying to restore the system to what it's always been. So we don't have to go tax somebody else to make up the difference for the hole that's being blown in the petroleum corporate income tax. The only reason that hole's being blown is because, as I said, the creators, the fathers of the petroleum corporate income tax system, based it on the corporate income tax system as a convenience and sort of built from there. The only reason that we've got this problem with Hillcorp is they've come into a way in the corporate income tax system that isn't captured by the base corporate income tax system and so it's not captured. We're not building on top of that into the, into their share of the of the petroleum revenue. It is it, is it they. They come in in a side door in a way that sort of takes out the base on which the petroleum corporate income tax is built and has allowed them to escape the petroleum corporate income tax. Allowed them to escape the petroleum corporate income tax and that's fine, but it is a problem that creates a hole in the petroleum corporate income tax system. That fourth problem.
Speaker 1:One other thing Larry personally I mean the right, I think is just cuckoo on this issue. I think they're just making up crap to complain about. The left is off in their own world. Larry personally writes an article, an opinion piece in the ADN that says Alaska needs to fix its tax problem, all of it. And what Larry says is not only do we need to tax the S Corp, the Hill Corp as a C Corp, we need to change it to be able to tax them, we need to change it for all of the S Corps. We need to tax all of the S Corps. That's nuts too.
Speaker 1:What we need to do is we need to make sure that the four prong petroleum corporate, the petroleum revenue system that we've had in this state since probably the beginning of the petroleum industry I've never traced it all the way back, but probably so that the four-prong system stays in place with respect to all of the players, all of the major players and these people who are complaining about trying to create new taxes or tax somebody that shouldn't be taxed.
Speaker 1:That's just nuts. It is a petroleum corporate income tax system. It has four prongs. We need to make sure those four prongs still work. And the reason we need to make sure those four prongs still work is to make sure we don't have to go tax somebody else in terms of PFD cuts or in terms of other new revenue sources to make up the hole that's being created by the way in which the Hill Corp's operating under the petroleumroleum Corporate Income Tax System. So the left's nuts about this issue by wanting to spread it to everybody else. The right's nuts about this issue, about wanting to complain about Senator Yount trying to bring the Petroleum Corporate Income Tax back together again so it can operate in the same way. It's operated since at least 1993 when I first got into it.
Speaker 2:Well, it's interesting because I would think that, as we're not thinking about this in the right way, we're not thinking about this as owners of the resource. You have a finite, excuse me, a finite, limited resource and as an owner, you want to get the maximum yield out of it that you can while you're going on. And if one and yes, it's not, I mean, it wasn't anything bad that Hill Corp did, they just took advantage of an existing law. But if it's not equitable and you're not receiving your fair share as an owner, as a resource owner, you should be looking at that, absolutely should be looking at that. And that's the problem. They're not looking at it as owners, they're looking at it from a philosophical standpoint of taxes are bad. I agree, I don't like taxes, but as an owner, if I was going to, if I had my own oil, well, you damn well better be sure that I was going to be getting all my fair share of that, of my resource that I am allowing you to take out in that way.
Speaker 1:And that's, and that's the thing people are missing. We've got a four-prong system to do that. Some people think, oh, it's just royalty. Some people think, oh, it's just royalty. Production tax. Some people think, oh, it's just royalty. Production tax and property tax. But it's a four-prong system. We've built it.
Speaker 1:If we hadn't built it that way, if we'd built it as a three-prong system, those prongs would be bigger, they would take more, because we wouldn't be collecting a piece of it through the corporate petroleum corporate income tax. And so what we've done is we've created a balanced system that that sort of operates through time as some pieces go up, other pieces go down, as as some pieces sort of flatten out, other pieces grow, and and you've built this system to sort of, over time, deal with the revenue source. Take a fair share of the revenue source from the petroleum companies. The petroleum corporate income tax is a key piece of that, especially during the next 10 years. During the next 10 years the production tax declines.
Speaker 1:Or even though production is growing, the production tax declines because of the way SB21 is set up. And so what helps offset that, in the big scheme of things, the way we've set things up, is the corporate income tax because that produces higher profits. The corporate income tax takes a higher share of the net profits out of the corporations to sort of offset the decline that's going on in the production tax. And now we're just now we're just, you know, saying, yeah, we got a wheel off the bus, we're just going to leave the wheel off the bus. So we got this three-pronged bus going down the road. Bad thing.
Speaker 2:That's why I think these folks are missing it, brad, is that they're not looking at it through the eyes of I mean, I could see where they're coming from, the people on the right. I could see where they're coming from in the fact that lowest taxes are the best plan and taxation is staffed and I get all that. But as an owner, if I'm owning something and I'm looking at it, I want to get maximum yield for my limited non-renewable resource. I want to get maximum yield for my limited non-renewable resource. I want to get the most that I can out of it.
Speaker 2:And if somebody has slipped through and we missed something and I mean S-Corps weren't even a thing back in the day, so that's how it got through there's no blame on Hillcorp. They're just taking advantage of the system as it's written currently. I mean it just makes sense as an owner to go back and revisit that. I mean to me I don't see this as being, again, I'm not a fan of taxes, but if it is my resource and I'm trying to get the maximum yield out of it that I can, that just makes sense.
Speaker 1:I don't understand all the fervor over it. This system is a four-pronged system to get at property, to get an investment. To get at production, to get at the benefits of production as you produce. To get the royalty share, our ownership share, as it's produced and, as an integral piece of the whole system, the petroleum corporate income tax, to get at net profits as a part of the share that is. I mean it's a whole system. That's four pronged. It gets at our fair share, as you're discussing it, from the resource and we've got this one piece of it that's gone amiss because of the way it was built, because it's built on the foundation of the corporate income tax. Not because we decided that we didn't want a petroleum corporate income tax from Hillcorp, not because we decided that somehow we needed to incentivize Hillcorp by having a different petroleum corporate income tax apply to them, to everybody else. Just because the by having a different petroleum corporate income tax apply to them, to everybody else. Just because the way we built the petroleum corporate income tax on this base of the corporate income tax. That's the reason they're getting out of it. It's not because anybody said, oh, they don't need to pay petroleum corporate income tax. Of course they do. That's one piece. That's one prong of how we get our share of revenues from the oil companies.
Speaker 1:And for people to say, you know for Marcy Sowers, who I don't know and probably is a great person, but that headline is just outrageous For them to say that somebody trying to get that piece back together again, get the four prong system back together again, is a bad person, a social justice warrior, it's just outrageous. That's not what Rob is doing. Rob has been up until the time he stepped off of the bill, for whatever reason he did. Rob has just been trying to keep the existing system going and I think both the left and the right have lost their minds about this. It's a technical thing. It's a technical detail. We've built the four-prong petroleum revenue system. One prong has been sprung because of the base that it was built on. We just need to go back and get that prong back in so we continue to have a four-prong system that's applying to the total oil flow that's occurring in the state.
Speaker 2:It's interesting to watch them. Basically, the feeding frenzy over this bill. Again, as I said, I'm okay with it, which I'm sure a lot of my libertarian friends are freaking out about. But again, I'm looking at it as an owner. I'm looking at it as an owner If I own the resource. That's how I have, that's the lens that I have to look at it through. And if I'm not getting, you know, my maximum yield out of that ownership, then I need to figure out how do I do that, how do I fix that? And, like you said, the four-pronged approach is important for that. And if we're missing out on one, then we need to adjust. To me it's just common sense. I don't understand why it's so contentious.
Speaker 1:It's conservative to go put this piece back together again. It's conservative to go put this piece back together again to go unspring the sprung piece of the prong of the system as it applies to Hillcorp. It's conservative to do that. We're just going back to what we've always done to make sure it continues to work. If you don't do that, you have to create new taxes to fill the revenue hole. I mean, that's the thing about Marcy Sowers. It just sort of drives me over the edge. There's going to be spending. It's just how we fund the spending. And if we're not funding it as we traditionally I thought that was the conservative thing as we traditionally have through the four-prong approach, we're going to have to go out and tax somebody else. That's exactly what we're doing with PFD cuts. So essentially what Marcy Sowers and the others who are going all crazy about this are doing is they're saying tax the PFD more, take more in PFD cuts, because we don't want to put back together this four-prong system. We want a three-prong system for Hillcorp.
Speaker 2:Yeah, kevin says. My guess is that he stepped off of that tax because they were planning to stuff an income tax or some other kind of revenue generation into it, which, again, is very possible, because that's what all the folks and the Democrats in the Senate have been talking about this whole time is more new taxes as well. All right, we're continuing. Brad Keithley, alaskans for Sustainable Budgets, our Truth Tuesday segment continues the weekly top three. The final question is is the Senate going to be the fiscal grown-ups in the room or not? That's a question I don't know the answer to it. I can suspect the answer, but, brad, what do you say? What are we talking about here?
Speaker 1:Michael, thus far this session we've had a lot of punting. The governor filed a budget that violated the law because it didn't balance. Nobody seems to care much about that. But the governor filed a budget that violated the law, had a budget that balanced only by pulling down the CBR and then once you went out a couple of years the CBR was gone because we pulled it all out and he had big zeros, big red marks on out in the future. So he just basically punted. He said look, I'm not going to try to be fiscally sound here or fiscally conservative or fiscally sustainable or fiscally anything. I'm just going to throw you a budget and throw it into the room and just you know, just you guys, you guys do something.
Speaker 1:And now the House has done the same thing. I mean, the House has passed the K-12 bill at last, at least, without knowing how the hell they're going to fund it East, without knowing how the hell they're going to fund it. House passes education bill with $1,000 BSA increases. State's fiscal situation grows bleaker. That was the Juneau Empire, the Anchorage Daily News, alaska House advances school funding boost over doubts about its costs. It just goes on and on and on. And then we're getting other stuff on top of it in terms of school maintenance. And it's just. I mean, these two branches of government the governor in the first place with his budget and the House in the second place are just not dealing with reality. They're just throwing it all down the road. The governor threw it into the House, the House is just throwing it into the Senate, an unbalanced budget into the Senate, saying we don't know how we're going to fund this. You guys figure it out and the question is is the Senate going to be responsible? Is the Senate going to be the grown-up in the room and finally come to grips with these issues that everybody else is refusing to deal with? They say they are. I mean, they say they've got proposals to deal with it. You've got the bill supported by the entire Senate Finance Committee that would reduce the PFD down to $25.75 statutory and may uses the magic word may but would theoretically reduce the PFD down to and hold the PFD at 2575. You've got Stedman saying that, oh, we're going to cut the K through 12, increase down to 600 and some odd million dollars when it gets over to us and that's going to be a piece of balancing the budget. But even after all that, we've still got this huge deficit, $500 million deficit. That's going to sit in the budget. But even after all that, we've still got this huge deficit, $500 million deficit. That's going to sit in the budget.
Speaker 1:And the question is is the Senate? Because the House isn't going to do it, the House essentially says take it out of the PFD, cut the PFD down to $750 million or $750 per PFD or something like that, to balance. The House isn't going to be fiscally responsible. So the question really comes down to is the Senate going to be fiscally responsible? And here's what it's going to take for the Senate to be fiscally responsible. They're going to have to do some cutting the $650 BSA increase that they've talked about instead of the House $600 to $1,000 PFD, or how $1,000 BSA increase that they've talked about instead of the house $600 to $1,000 PFD, or how thousand dollar BSA increase is is part of that. They're going to have to deal to some degree with deferred maintenance, because they're the ones bringing it up and do something with the, with the, with the dollars there. But they're also going to have to come up with some revenues and even if you would accept which I don't that it's fair and equitable to come up with, to use 25-75 as the split on the PFD, the split for the PFD 25 of the PFD 75 of government, even if you accept that they still have a big hole. So they're going to have to come up with some revenues. The closing the Hillcorp loophole, restoring the four-prong for those who didn't hear the second segment, go back and listen to it again restoring the traditional four-prong corporate revenue, petroleum revenue approach. That's going to have to be part of it. That'll get you some of the way there.
Speaker 1:Going back and looking at SB21, as we've talked about on the show previously, adjusting SB21 to get back to the same percent overall percent of the gross that we've had the past decade. We're not talking about changing the revenue that SB21 produces. We're just talking about getting SB21 in this environment that it's in over the next decade, getting it back to the same percent of gross overall percent of the gross that we had just this last decade, the first decade of SB21. That's going to need to be part of it and maybe we squeeze by with just that and maybe they can get out of town with a balanced budget just by doing that Cuts, closing the Hillcorp loophole and revisiting SB21 and getting it, readjusting it in the new environment we're facing over the next decade and getting it back up to the same share of the gross that we've had over the last decade. Maybe they can get out of town with that, but that's just getting them out of town this year.
Speaker 1:As you look at SB21, as you look at the production tax from MSP 21, it goes down Even as production is rising. It goes down because of the incentives on top of incentives on top of incentives on top of incentives, kicking in in a way that I don't think anybody contemplated when it was passed, kicking in over the next decade. So you're going to have to fix that and get that back up to the same share of the gross and deal with the incentive issues so that you don't distort the incentive issues but deal with the incentive issues as you're doing that. You're going to have to do that. You're going to have to restrain spending over the next 10 years. That's going to have to be part of it. And you're going to have to deal with how you're going to get a personal tax, whether it's a PFD cut, which is a personal tax, or an income tax, or go back to Ben Carpenter's brilliant I want to say this about 20 times brilliant, broad-based, hugely broad-based, ultra broad-based sales tax, which took very little from anybody but by taking it from everybody, built into some revenue.
Speaker 1:Whether it's going back to that, they're going to have to deal with that. The House, the governor, just isn't going to deal with it. Governor has refused to deal with it. He's out traveling. I don't know what he's doing, but he's not being governor. The Senate just wanted to please all of its constituencies and pass spending on top of spending on top of spending. So the Senate's going to have to kick in and be the adult in the room. But to be the adult in the room, they need to be supported in the things you're going to need to do Cuts, certainly to the K through 12, to the BSA increase, closing the Hillcorp loophole, adjusting SB21 to reflect the reality we're in over the next decade and then looking at how we're going to raise money personally, either through PFD cuts or in some other way. That's much more broader and would include non-residents and other sources of income.
Speaker 2:The interesting part about this discussion for today in this segment was the fact that they're now talking about these school maintenance funds and things like this. But again, how much of this lays back on the school districts, who have been deferring the maintenance on these things for years. I mean, this has always been a pet peeve of mine, the deferred maintenance. And now they go to the state and say, well, now we're in trouble, now we need it, now we need the help. And Jesse Keel actually is even quoted in this article saying that he wants to lift the moratorium on the school bond debt reimbursement. How are we going to pay? I mean, again, there's the who pays thing. Nobody seems to be asking that question. It always seems to be going on like oh, don't worry, the money will always be there, we'll be fine. A minute.
Speaker 1:Brad. Well, deferred maintenance is huge in and of itself. I mean, this is sort of the first time we've talked about it. We may talk about it in subsequent shows, but the standard 3% that the Department of Education applies, that would be $330 million a year at current values. So it's huge. I mean, if we talk about bringing deferred maintenance back in, that's a huge chunk to the budget. Yes, the school district should have handled it. Yes, the state should have handled it. Yes, the state should have handled it before now. But you know, we've got school districts falling apart, we've got school buildings falling apart that we're going to have to deal with.
Speaker 2:You're wrong. Md Brad just said it was the governor's fault. I mean, it's a combination of both the governor, you know, not putting it into his budget, these, you know, these deferred maintenance plans, and the legislature doing their things as well. I mean the school boards. They've been pushing this stuff off forever. I mean, what the heck? You knew it was coming. And then they look to the state like, well, bail us out, daddy. That's what they keep coming back to.
Speaker 1:Yeah, so it goes both ways. I mean, so deferred maintenance is supposed to be a separate line item. The state has a responsibility. I mean the state has a responsibility by statute for deferred maintenance and so the school districts put in projects and the state's supposed to fund them. The state hasn't funded them so they haven't set the money back to the school districts. Now the school districts would have had the discretion to take the money that has come back to them and use part of it to cover the deferred maintenance. They could have allocated a part of it themselves, even though the state didn't separately line item money back to them for it. They could have used a part of it themselves. They could have used part of the property tax that they get from local sources to deal with it.
Speaker 1:So yeah, it's a shared responsibility. If you talk to somebody on the school districts which I've done if you talk to somebody on the school districts and say, oh, it's all the state's responsibility. We put in these projects, they haven't funded them. You know, the fact they're falling apart is the state's responsibility, and then you say, but yeah, you could have put funds toward it. Oh well, I needed the funds for, you know, healthcare for teachers or for teacher, you know additional additional salaries for teachers, or you know for this project or for that project or for the other project, and so it's it's a, it's a shared responsibility between the two.
Speaker 2:But regardless of how we got here, it's now a huge dollar figure that's beginning to come at us that we've got to deal with in some fashion. Rob Myers makes the point. This deferred maintenance has been brewing for decades. We had a bunch of cash in 2013. We decided it was more important to build AstroTurf football fields. He's not wrong. I mean, everybody was asking for it. I mean, the Fairbanks-Norrisburg borough was like, oh, we need AstroTurf. I mean, if they've got an AstroTurf field in Barrow, we need one here. We need three here. I mean, it was just shaking my head like, come on, guys, there are better things to spend the money. And and that was at the point where they still had tens of millions of dollars in deferred maintenance on other things. We should have been taking care of the buildings we had.
Speaker 1:Well, yeah, and part of the problem is, you know the state was paying half of the construction of new schools. So you know, the local municipalities looked at it, or the local school districts look at it, as free money. Basically, right, we can go out and we can. You know, we can favor our favorite architects. We can do our favorite. We can. You know, we can favor our favorite architects. We can do our favorite contractors. They can all, you know, get this money and the state will. They can all get this money and the state will pay half of it instead of paying, instead of contributing that money toward deferred maintenance of the buildings we already had.
Speaker 1:So we created more and more and more of the problem during that era by the state, you know, paying for half of new school buildings and encouraging people to go out and build more and more and more, as opposed to taking care of what they already had. So it's a shared problem, but it's a big problem that's beginning to land on people's doorsteps and again it's the Senate who's getting forced into being the grownup in the room because the House hasn't dealt with it. The house hasn't talked about how to fund it. The house hasn't talked about the amounts just like. Well, give me the.
Speaker 2:Vegas odds. Do you give me the Vegas odds on what you think you think the Senate's going to actually step up and have to and do that? I mean I. I mean what?
Speaker 1:do you think? I think? I think I I have a lot of concerns about the Senate. I think some of them have good intentions. I think some of them are just like House members, in the sense that they just want to curry favor with whatever constituency, whatever trade group they've got out there that help fund their election.
Speaker 1:Some of the senators, I think, have good intentions, but one of the things they could do is spend some time figuring out what's going on with the Permanent Fund Corporation. One of the things they could do is look at the type of deficient returns that we're getting out of, the deficient compared to where we could be that we're getting out of the Permanent Fund. I mean, that's a revenue source and, frankly, the administration, the commissioner of revenue, ought to be looking at that, but he's off doing other things. He's getting ready to run for governor, so he doesn't want to be bothered by those things. It's in his job description, you know, and so we just got people just sort of running around and not doing the job. The Senate says they'll do the job.
Speaker 2:We'll see. Brian said but look, look at this new center of science-y stuff that we can't afford to operate, but it will look great on the brochure in color. I mean, that's typical, that's what we see all the time. Oh, but look at this, it'll be great, we'll put it up there. I mean, we finally fought for fiscal notes in the borough to finally, when I was there to finally get you know, put on the fiscal note what the cost of keeping the building going was.
Speaker 2:That took a Herculean effort to get that on there. I mean, come on, we've got to know great, you build the building, how much is it going to cost us in the next 10 years? And it's like nobody was thinking about that. It's like, once you build it, oh, now it's done. But we kept seeing the maintenance be deferred, deferred, deferred. I mean the Fairbanks-Dorchester Borough has a quarter of a billion dollars in deferred maintenance for a government of 100,000 people, less than 100,000 people. A quarter of a billion dollars. And this is, you know, and remind me who is the revenue commissioner? Adam Crum. That's who the revenue commissioner?
Speaker 1:is Brian if you're asking there. All right, brad. One less than a minute Final thoughts. Michael, we got big issues in front of us, but people need to deal with it reasonably. This stuff that Rob Young's been through is just insane. We've got to have people who will take the time before they fire off crazy op-eds and must read. We've got to have people who will take the time to actually understand what we've done in the past and that Rob's just trying to continue what we've done in the past. Going forward, we need to reinforce those people who are trying to come up with reasonable sources of revenue as opposed to castigate them every time that they open their mouths.
Speaker 2:All right, brad. Thank you so much, my friend. Good to talk with you. We'll see you next week. Michael, as always, thanks for having me Well.
Speaker 1: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.
