Opinions

Alaska need not suffer; let's leverage our wealth to thrive

You may have recently noticed in the newspaper a larger emphasis on economic coverage. We are as concerned as you are about the severe downturn in oil prices and the uncertainty of Alaska's future economy.

Providing in-depth reporting and diverse public opinion on this topic is one of the main reasons I bought this newspaper a year ago. An honest, informed conversation about our economy is one of the best contributions we can make to Alaska. To that end, we have ramped up our daily coverage of the state fiscal crisis and launched an Economy section that appears on page A-3 every day except Mondays. Look for even more to come.

Today, I want to share with you one idea that could help fund state government. Some in state government and the business community have talked about it, but there hasn't been any news coverage, in part because there isn't any formal proposal. But this idea would spare us the economic pain of austerity -- and do so responsibly.

Here's the concept in a nutshell: Besides oil, Alaska has another vital resource -- huge cash reserves and assets. This, in turn, provides us credit and the ability to borrow money against it. And with today's low interest rates, it may be the perfect time for our state to borrow. We could then take those cash loans and invest them in the markets, and earn a rate of return much higher than the interest we pay. Anything we'd earn above the interest rate could be used to help fund government.

We have approximately $100 billion in our various investment accounts -- more than 15 times the amount of cash the state spends annually at current spending levels -- that includes the Permanent Fund, state savings and investment accounts, and state employee retirement funds. That could secure billions in working capital at low rates.

Borrowing against that wealth at favorable terms, we could sustain a reasonable economy with quality state services in education, public safety and sound development. In short, there's no reason to suffer. We are still wealthy. We just need to leverage our wealth.

There's nothing radical about this. Think of it as the home-mortgage concept many of us use in our personal lives.

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We get 30-year mortgages for our homes and repay them slowly, building up equity over many years. That way, we can use the rest of our income to achieve what we think is most important -- investing in our children and our own futures. We take out student loans that we repay when we have steady employment. Car loans and credit cards allow us make purchases that we finance over time. For most of us, well-managed debt is a handy tool to improve our circumstances. It frees us from being held back in our lives by providing us "cash flow" when we need it.

On the state level, this concept can work even more profitably because of the wealth we can leverage at current low interest rates.

The state of Alaska can borrow against its vast cash and investment funds, perhaps at rates of about 2 percent. If Alaska did take out a loan on such terms -- let's say $50 billion -- that money could be prudently invested to earn at least 10 percent.

Earnings of 10 percent, less the cost of 2 percent, could produce a net cash flow to the state of 8 percent on $50 billion, or $4 billion per year. That cash flow could fund crucial economic activity, from education to infrastructure to developing new value-added processing and manufacturing.

And that is not where the economic benefit would stop. State spending could continue at a healthy level. State and private sector workers could avoid the economic shock of losing their jobs. Businesses could keep their doors open and invest in future growth. In effect, we'd diversify our economy and lessen our dependence on a single industry.

Of course, we would still need to restrain spending, still encourage responsible oil and gas development. But drastic belt-tightening alone will only take Alaska's economy down. Just like borrowing, budget-cutting has to be rational and done with an eye to the future.

Money -- unlike crude oil and natural gas -- is not a diminishing resource. When managed properly it yields perpetual returns. In fact, due to compound interest, our financial assets could be thought of as a "reverse Prudhoe Bay." Over time the assets grow and grow -- they don't shrink. In 2006, the Permanent Fund was worth just over $30 billion, today it is more than $50 billion, and by 2025 it is expected to climb to $80 billion, even with the ups and down of the financial markets. And it will continue to grow, even if we borrow against it.

Our state has been impressively effective at preserving Alaska's accumulated wealth. Now it's time to use that wealth to allow our economy to keep growing, while its oil income is buffeted by new and harsh external forces. Even in a good price environment it will be hard for oil to generate the large revenue we have seen in the past. In addition, world commodity prices are simply beyond our control.

Much like the servant in the parable of the talents, Alaska has merely stored its wealth, rather than make it perform for the good of its owner. We can do better -- but we are running out of time.

If all we do is "store" the state's wealth and tap our budget reserves, within the next few years we'll drain both the Statutory Budget Reserve and the Constitutional Budget Reserve.

That would leave us no option but to raid Permanent Fund earnings.

Instead, by prudently using financial leverage to restructure our wealth, we can double the Alaska Permanent Fund and other state cash assets every 10 or 12 years.

Let's consider the modern, prudent way forward: raise the operating and capital funds we need from our own assets while the world's capital markets offer such favorable terms. These conditions won't last forever. Let's put our wealth to more productive work now, for ourselves and generations to come.

Alice Rogoff is the publisher of Alaska Dispatch News.

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

Alice Rogoff

Alice Rogoff is the former owner and publisher of Alaska Dispatch News.

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