The first week of 2016 was a rough one for investors, as the S&P 500 dropped nearly 6 percent. With the stock market correction, the Alaska Permanent Fund is now valued at about $50 billion, close to what it was two years ago.
If you are a long-term investor, it's best not to make any judgments on short-term results, though it's important to track trends over time. The Permanent Fund gained about $2 billion in the first two months of 2015, but lost more than that in the last month of the year. The fund dropped nearly 3 percent, about $1.5 billion, between Dec. 28 and Thursday, the last day for which a figure is available.
Even with these recent fluctuations, the fund has been as stable as bedrock in recent years compared to oil, formerly the largest source of state revenue.
Two years ago oil sold for $102 a barrel. Now it is down to about $36 a barrel, a 65 percent decline that has triggered the biggest upheaval in state finances in 30 years.
As we enter 2016, there are many ways to steady the state's fiscal picture — all of which must involve the Permanent Fund. Nothing else comes close.
While that understanding has yet to sink in with those who haven't studied the numbers, resolving the budget dilemma has become the dominant political issue of the moment and everyone has an idea or two: Cut the budget. Raise oil taxes. Bring back the income tax. Raise taxes on mining, fishing and tourists. Start a state sales tax. Raise user fees. Start a lottery. Wait for the big marijuana payoff. Cut the dividend. Don't touch the dividend. Don't do anything until after the next election.
All of these ideas come with economic trade-offs. Postponing action until after the next election is one of the riskiest, while deciding this year on a combination of proposals that address the problem could make a difference around the edges — meaning hundreds of millions of dollars.
The only way to deal with the multibillion-dollar gap, however, is to direct a large segment of the state's investment earnings into the picture, transforming the way Alaska pays for state government and most of the costs of local schools.
Investment income has become the largest source of state revenue, a renewable resource with the potential to keep Alaska a state with relatively low taxes and prevent what could evolve into the largest and most costly recession in state history, exceeding the downturn of the late 1980s. If the state mishandles this situation, it's easy to see how real estate prices could tumble, many businesses could be forced to close their doors and job losses could pile up.
Recognizing the financial reality brought by the oil price collapse is the first step in the recovery program. After that it's a matter of seeing that Alaska has large financial resources that can be used to cushion the blow, while keeping the economy from self-destructing.
The Permanent Fund has operated, if not in obscurity, at least with a remarkable degree of insulation from day-to-day Alaska politics since the first deposit of $734,000 took place on Feb. 28, 1977. That's because the state has enjoyed oil-fueled prosperity for most of the past four decades.
The fund grew because the state had enough money flowing into the treasury from oil taxes and oil royalties to pay its bills and not worry much about the constitutionally required savings account.
Over those years, there was a near-total public focus on the health and welfare of the Permanent Fund dividend, financed with about half of the profits generated by the fund. As long as the checks kept coming, Alaskans and their elected representatives felt satisfied with the fund management, buoyed by stock market gains.
I suspect the investment policies and performance of the fund are going to be subject to far more scrutiny now that we have entered an era in which it has to become something more than a dividend machine.
It is possible that international calamity will send oil prices back to triple digits and provide temporary relief for Alaska, but praying for disaster is not much of a financial strategy. Plus, the long-term trend of declining oil production shows no sign of a dramatic turnaround. We will be lucky if Alaska oil production can be stabilized or show slight increases in the years ahead.
It is also possible that the fear of touching the Permanent Fund will lead to a political stalemate, which could mean severe economic consequences in 2017-18.
The transition ahead for Alaska will not be easy, but the problems are not insurmountable.
Using the earnings as a foundation for state government means that something has to give with the dividend or with our expectations about preserving the buying power of the Permanent Fund for future generations.
Gov. Bill Walker announced a plan late last year to transform the way state government operations are funded. His proposal would pay for the bulk of state services with investment earnings from the fund, supplemented by a variety of other proposed tax changes. He has also proposed a plan to pay dividends from a percentage of royalty oil income. The numbers and percentages are subject to revision through the normal give-and-take that leads to compromise.
I hope the Legislature will get to work on this immediately, schedule public hearings and either revise the plan or offer a substitute. Legislators who say they want to focus on budget cuts — always a popular option as long as details are never mentioned — should not use that as an excuse to avoid dealing with the larger issue.
The Legislature needs to do more than debate these ideas in 2016 if it wants to avoid a crisis of confidence in the Alaska economy. The downgrading of the state's credit rating last week came with a warning from Standard & Poor's that should be heeded: "The negative outlook continues to reflect our opinion that if lawmakers do not enact significant fiscal reforms to reduce the state's fiscal imbalance during its 2016 legislative session, Alaska's downward rating transition will likely persist."
Columnist Dermot Cole has been reporting and writing about Alaska politics for 40 years. He lives in Fairbanks.
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.