Late October was an interesting time for Alaska fiscal issues with Gov. Bill Walker revealing more details about his fiscal plan. The signature move of the plan is to do away with the PFD and replace it with an oil royalty check that would pay half the amount and likely decline over time, so it may be that the plan is dead on arrival. Meanwhile, a plan developed by Scott Goldsmith, professor emeritus of the University of Alaska's Institute of Social and Economic Research, ISER, has been gaining traction and better understanding. Oddly enough, the governor campaigned on much of this plan in 2014. So what is going on here?
I almost wonder if the governor secretly is still supportive of the Goldsmith plan but doesn't believe it to be politically feasible, yet. The move then would be to propose a plan that is a poor fit for Alaska, one that attacks the PFD, and then when it fails, pivot back to the original plan -- or better yet, let the opposition present an alternative. The Goldsmith plan is the only known alternative at this time.
The plan Walker is proposing comes from Dr. Khalid Alsweilem, as reported Oct. 28 in the Juneau Empire. He was the head of the Saudi Arabian "Permanent Fund," known as the Saudi Arabian Monetary Agency, and is a fellow at Harvard. The Saudis have not adopted his plan.
Currently, a minimum of 25 percent of Alaska's oil royalties flow into the Permanent Fund, the other 75 percent and all the oil taxes flow to Juneau. The Saudi Arabian plan calls for 50 percent of the state's royalties, all the taxes, and the state's fiscal assets, including the Permanent Fund, to flow into a new sovereign wealth fund. The remaining half of the royalties would then fund royalty dividend checks that would result in a roughly 50 percent decrease in check size -- while also tying the check to a declining asset, oil production.
The new sovereign wealth fund would presumably help pay for state spending in perpetuity. The problem is that it would destroy the Permanent Fund dividend and is therefore politically unworkable. Next, in terms of sustainability, it wouldn't close the fiscal gap. That gap is currently about $4,500 for every man, woman and child in Alaska. New taxes and/or spending cuts would need to come with this Saudi plan on top of the PFD tampering for it to be sustainable. Most discussions seem to be centering around new taxes.
Meanwhile, at the University of Alaska's Institute of Social and Economic Research, Dr. Scott Goldsmith has been continuing to update his long-standing model for Alaska. Goldsmith has lived under and studied Alaska's economy for over 40 years. The claimed innovative strengths of the Saudi Arabian plan of decoupling the government's spending from oil and coupling it to the return on a wealth fund have in fact been proposed by ISER's Goldsmith for years now, except that his plan is preferable.
In it, levels of state spending would not be linked only to returns on the financial markets, like the Saudi plan calls for, but rather they would be linked to long-term average oil prices and long-term rates of return on financial assets, thus being very stable year-to-year. Goldsmith's plan calculates the sustainable rate of spending to be about $4.5 billion per year while also keeping the PFD under its current dividend formula with inflation and population proofing accounted for.
Our current total spending is about $5.3 billion. With hundreds of millions of dollars in oil tax credits on the chopping block for the next round of cuts, it's hard to imagine a scenario where the $4.5 billion figure will not reasonably be achievable within the next few years. Goldsmith's plan doesn't take away the PFD or call for any new taxes so long as we keep our eye on the ball and hit the $4.5 billion mark. Perhaps that is why both Commonwealth North and the Alaska Chamber of Commerce have supported the Alaska-tailored Goldsmith plan.
We are incredibly blessed in this state to have the tools necessary to reasonably deal with our fiscal issues and still have a realistic possibility of no new taxes and keeping the PFD. This is due, in large part, to excess earnings on the state's fiscal assets that go above and beyond paying for the dividend.
It has been said that two people who have one dollar each can meet on the street and exchange dollars and both walk away with one dollar, but two people on the street with unique ideas can exchange ideas and each walk away with two. With that in mind, it is beneficial for us to have multiple ideas to consider. In the free marketplace of ideas, I clearly prefer the Alaska-grown plan that has a realistic shot at saving the PFD, not adding taxes and leading to stable state spending over the Saudi/East Coast/Harvard plan that would very likely take half the value of the PFD away, add taxes and link spending to volatile financial asset returns.
Aaron Lojewski is a realtor in Fairbanks. He holds a master's degree in economics from the University of Alaska.
Correction: The first published version of this commentary incorrectly credited Dr. Scott Goldsmith's budgetary ideas to ISER as a whole. That language has been corrected in the text above and in the headline.
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