Revenues from the Alaska oil production tax have dropped 95 percent in the last three years, from $6 billion to about $300 million.
With that collapse, brought on primarily by the reduction in oil prices to $50 per barrel, the state has to look to its largest renewable resource to pay some of its bills: investment earnings.
This is more of a necessity than an option.
As a first step, Gov. Bill Walker's administration is about to release plans to rebalance the state's financial portfolio and draw on Alaska Permanent Fund earnings. It will also require rebalancing Alaskans' attitudes about the purpose of the Permanent Fund, which will include its use to help support government operations.
Why? Because the state is now spending $3 billion a year from its savings accounts, putting its economic future at risk. Compounding the problem is the loss of the permanent earning potential inherent in a $3 billion asset. That adds up to hundreds of millions of dollars in additional losses every year, with little hope that the savings will ever be replenished.
Despite claims to the contrary, spending some Permanent Fund earnings for government is no more a raid on the fund than the current system is a raid on the general fund. The constitutional amendment that created the fund in 1976 says legislators have the power to decide what happens to the earnings.
We don't know exactly what Walker plans to propose for a financial makeover, but from public statements he and others in the administration have made, it will include coordinating investments in the Alaska Permanent Fund, the state retirement accounts and other large holdings. The governor is also expected to offer a plan to use some Permanent Fund earnings for government operations, retain the Permanent Fund dividend at some level under a new formula and institute a variety of tax changes.
"Let's take into consideration the wealth that we have and how could we use that wealth differently so that we have a sustainable source of revenue for the decades into the future," Walker told the Alaska State Chamber of Commerce in Fairbanks last week.
"There is time to make some tough decisions. And it's going to impact pretty much everybody in this room," he said.
Walker said that the budget needs to be sustainable and stable so government spending does not shoot up when oil prices rise and collapse when oil prices fall. Oil prices are volatile, but the state can absorb some of the volatility with a shift to the Permanent Fund — providing a buffer whether oil is up or down.
The state has enough savings to continue business as usual for a little while, but the outlook for five years hence is not encouraging. The people in politics are saying no dramatic change can take place because we are approaching an election year, but the financial imbalance has become so extreme that inaction poses a threat that overshadows campaign posturing.
If we care at all about the future and want to build confidence that Alaska is a solid place to invest, we will recognize the need to take some control over our destiny instead of putting faith in the prospect that the oil ministers of OPEC will ride to the rescue with production cuts.
A special session will convene this weekend in Juneau, with a focus on the gas pipeline, which some people hold out as the great hope for the future. I will believe it when I see it. It's possible that this time may be different, but right now I have about as much trust in the gas pipeline talk as I have in the guy who just called me claiming to be from Microsoft tech support.
For Alaska, there are not likely to be any easy answers. Part of the solution means recognizing a new reality. As happened in the late 1990s, when oil prices dropped and Wall Street boomed, Alaska's financial resources are generating far more income than oil is. Oil production is half what it was in the late 1990s, and even if the current 4 percent minimum gross oil tax were raised to a reasonable level — which should be part of a balanced financial fix — the state would still be making more from investments than from oil. And unlike oil, financial assets are renewable, if managed correctly.
In this era where investments that are easily converted to cash are providing no real return because of low interest rates, the idea is to keep no more than what is needed in those liquid investments to pay state bills each year.
This would allow the balance of the assets in each account to be invested in ways that could produce greater long-run returns. This is similar to what individual investors do when they rebalance their portfolios for diversification and growth. The state accounts have been set up without any attention to how they might be made more efficient, so something like this is long overdue.
As it is now, every fund under state control has some of its investments in accounts that produce no return, not even keeping up with inflation. This includes everything from the account that pays subsidies for electric power in rural areas to the state pension funds and the Constitutional Budget Reserve. That reserve is the dwindling savings account that is now paying 60 cents of every dollar the state spends. Alaska is earning next to nothing in interest on the $7 billion in that fund because it has to be ready for spending in the next couple of years.
Rebalancing the portfolio would help that problem. In theory it makes a lot of sense to consolidate assets for better returns, but this is a complex undertaking that will require a thorough review by the Legislature to ensure that safeguards are in place.
No investments come without risk and there are no guarantees that the stock market will rise or that money will always be made in real estate, biotech startups, foreign stocks, corporate bonds or the other investments that have grown within the $52.6 billion Alaska Permanent Fund. The fund value can change quickly. After a multibillion-dollar summer slump, it has now risen $2.8 billion since Aug. 24.
There are also risks of basing the entire state financial system on the price of oil, as we have discovered yet again over the past year.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com.