The PCE lawsuit is going to be a game-changer no matter the outcome

Political leverage, state budgeting and 82,000 Alaskans' energy bills. Way more than anyone wanted to know about the PCE lawsuit and what's at stake.

Good evening, Alaska! Sorry for the late one today, I’ve spent the better part of my day reading through legal filings, chatting with some folks and writing this whale of a newsletter.

In this edition: Everything you wanted to know about the PCE lawsuit while we wait on its ruling, a correction and the reading list.

Is everything sweep-able?

All eyes are on Anchorage Superior Court Judge Josie Garton this week as she deliberates one of the most consequential cases of the Dunleavy era. The lawsuit challenges whether Gov. Mike Dunleavy’s expansion of the annual budget sweep to include the Power Cost Equalization program’s endowment fund was legal and constitutional or whether it should be reversed and the program funded. In the grand scheme of things, it is a potential game-changer that could upend the way the Alaska budget works and, in doing so, the levers of power and who holds them. In real-world terms, there are some 82,000 Alaskans who’ll be seeing it on their electric bills.

In real-world terms, the inclusion of the fund takes away the source of money for the Power Cost Equalization program line in the budget the Legislature barely enacted in June. This move, which stems from a long-disputed legal memo written by former Attorney General Kevin Clarkson in 2019, has been criticized as a “back-door veto” of the program that should be left to do its own thing (earn enough money to run the program every year without additional inputs from the state). Republicans claim to support PCE, but have argued that the program shouldn’t have its own dedicated fund that spares it from the annual political battles over the budget. Either way, it’s leaving many rural Alaska communities out in the cold. The Anchorage Daily News has a report on how it’s playing out throughout Alaska that paints a pretty dire picture with already-expensive electricity bills expected to double in some communities (going from $180 to $300 in Galena, for example). Restoring the program’s funding will either require a change in the governor’s interpretation of the sweep rules—either through this court ruling or, I suppose, a settlement—or the Legislature to negotiate its way to a three-quarter vote to get the money out of the CBR (and again every year forever) or they can fund it through the normal budgetary process (and again every year forever).

In political and policy terms, it could prove to be world-changing whichever way Judge Garton ultimately rules. Both sides are asking the court to settle once and for all whether or not the Legislature can set aside money for a specific purpose, thereby avoiding the sweep (but, importantly, the Legislature can always change its mind). By the way, the sweep is the constitutional requirement that money leftover in the general fund at the end of the year goes to repay the previous withdrawals on the Constitutional Budget Reserve account (this is one that takes a three-quarter vote of the Legislature to access that also has a withdrawal deficit so high that I don’t think I’ve heard anyone suggest it’ll ever be fully made up).

As it’s stood so far, the answer to the question of the Legislature setting up some semi-dedicated funds has been “Yeah, mostly.” Previous administrations have conducted the sweep but left alone many funds that were specifically set up by the Legislature. There have been some decisions and rulings here and there on the issue that have decided, for instance, that sweep-able funds must be in the general fund and available to be spent by the Legislature. What hasn’t been clearly answered, though, is what precisely is in the general fund, a broad budgeting term that differs depending on who you ask but I’ve typically heard it described as the state’s checking account (which is really underselling its complexity).

Where Dunleavy’s administration has broken from precedent is in that 2019 legal memo that argued that if something could be treated like the general fund, then it is the general fund. Today, the state quite argues that “all state money except the constitutionally-created funds” is in the general fund and therefore sweep-able (those constitutionally-created funds would be the Constitutional Budget Reserve and the corpus of the Alaska Permanent Fund). If that’s what the court rules is the definition of the general fund then, hooooo boy, things get very interesting very fast. That’s in large part because—surprise—Dunleavy hasn’t been exactly applying his expanded scope of the sweep all that consistently. Left outside of his expanded sweep but meeting its requirements, at least to the eyes of folks who know better than me, are a lot of development- and industry-focused funds that are likely a little more dear to Republicans who’ve been hoping to leverage the vote. More importantly, though that definition probably could be stretched to include things like investment funds, pension funds (!) and the crown jewel of them all: The Earnings Reserve Account of the Alaska Permanent Fund. And, yes, the courts have already said the now-very-big Earnings Reserve Account is not subject to the sweep, but it’s my understanding that those rulings weren’t explicitly about the sweep-ability of the ERA but were instead cases of judges using it as an example of a non-sweepable fund (which would suggest that there might be other non-sweepable funds out there but, hey, what’s precedent after all?). What happens then is really, really hard to predict but things could get messy... but I guess the CBR would finally be repaid.

So that’s all to say, whatever ruling Garton makes (with the expectation that this will be appealed to the Supreme Court pretty much no matter what) has the potential to be a significant shift from where we are today.

If the court rules in the state’s favor and gives us a clear, expansive definition of what is subject to the sweep, there would be a helluva lot of other funds that would likely get caught up in here, thereby diluting the one-sided-ness of the current discussions. All of the sudden there could be more and bigger problems—well, you know, in addition to the 82,000 Alaskans with skyrocketing energy bills—to fix that everyone would have interest in fixing.

If the court rules in the plaintiffs’ favor, then the Legislature pretty much gets the green light to set up funds separate from the general fund and safe from the annual sweep. The state has warned against this in pretty dire terms, arguing that the Legislature could just sticky note all the money to keep it away from the sweep. Though, I would argue that’s really downplaying just how difficult that would be in reality and how desirable of an option it might actually be for legislators. After all, you never truly know who’ll be holding the keys to the savings account after the last election. After all, the last time the state had money, the Legislature opted to voluntarily sock much of it away in the Constitutional Budget Reserve, banking it behind the three-quarter vote. In political terms, it takes away a quite a bit of leverage from Dunleavy and his allies over the rest of the Legislature. With PCE funded and protected (well, as long as there’s not the 21/11 votes needed to dissolve it), the Legislature could likely avoid the three-quarter vote altogether this year given what is almost certain to be costly negotiations.

Supplemental briefings: Following Friday’s oral arguments that left a lot of people feeling uncertain about the outcome, Garton requested supplemental briefings from the parties to discuss whether or not the source of the money that filled PCE’s endowment fund—whether it be the Constitutional Budget Reserve or appropriated out of the general fund—should have any bearing on the case. Interestingly, neither the state nor the plaintiffs really touched on this issue in much depth in their briefings (which were submitted by noon today) with both arguing that the source of money doesn’t really have any bearing on the case.

The state’s response is pretty short and says, essentially, no because everything except for the CBR and ERA are in the general fund. The plaintiff’s filing is in a bit more depth and argues that it doesn’t matter because, regardless of where the funds came from, the Legislature has the power to set up funds separate from the general fund. They argue, though, the governor is relying on the source mattering for what is sweep-able and what is not sweep-able, drawing a comparison of the Alaska Permanent Fund’s earnings reserve account to the Power Cost Equalization endowment fund.

“Although the source of money is entirely irrelevant under the two-part test found in (the constitution’s sweep language) in order to define “the general fund” as including everything but the Permanent Fund and the CBR, the Governor implicitly argues that the source of funds for the ERA is why that particular separate fund is not part of the general fund, while the PCE Endowment Fund somehow is,” argues the plaintiffs’ briefing. “This distinction is found nowhere in law or in any of the materials cited by both parties from 1990, and again highlights a fundamental flaw with the Governor’s legal reasoning. … There is no meaningful difference between the ERA and the PCE Endowment Fund; both are separate accounts which exist outside of the general fund, and therefore neither is subject to the sweep.”

Neither account is outlined in the Alaska Constitution and both were set up by the Alaska Legislature, but one isn’t sweep-able and the other is?

Stay tuned.

Correction

Gov. Mike Dunleavy said he’d consider supporting a sales tax if the proposal passed through the Legislature, not the income tax that was mentioned in Friday’s newsletter. Elected Republicans of all persuasions have been pretty universally opposed to an income tax so far, focusing their attention in on a sales tax that will have trouble winning support from the more progressive-minded (both in politics and taxation policy) politicians.

Reading list