Anchorage Daily News

Tuesday, the state House voted 30-7 to divert a large stream of oil tax money into an endowment that could help support future state budgets.

Give the measure's supporters credit for trying to be fiscally responsible. They found a creative, politically feasible, bipartisan way to tie up a good chunk of the state's surplus oil income. Passing this proposed constitutional amendment would be the closest thing the state has come to a long-term fiscal plan in years.

Only one problem: It's the right idea applied to the wrong fund.

The fund in question is the state's constitutional budget reserve. It was created to be a savings account for fiscal emergencies, such as when the price of oil collapses and state oil money dries up. The budget reserve is a financial shock-absorber.

With the House-passed proposal, though, the budget reserve would no longer be much help in a financial emergency. It would become an endowment that supports ongoing state government.

For seven and half years, the windfall profits portion of the state's new oil production tax would go into the new fund. Every year, 5 percent of the fund's five-year average value would automatically go into the pool of money for state spending.

No longer could the reserve supply $1 billion or $2 billion to balance the budget if oil prices suddenly crashed or the pipeline shut down for months. In the mid-1980s, an oil price crash blew a $1 billion hole in the state budget and devastated the state's economy. Since then, Alaska's budget has grown a lot bigger, and oil production has dropped by almost two-thirds. We're as vulnerable to a big price drop as ever.

With only 5 percent of the money available each year, the House-passed "reserve" fund could maybe supply $250 million to deal with a budget crisis. That amount might double over time, but the revamped "reserve" could not supply enough to fill a serious budget gap.

Facing a huge financial crisis, lawmakers would have to look to the earnings reserve of the Permanent Fund. That account holds the earnings of the fund left over after it pays for annual dividends and inflation-proofing.

The earnings reserve carries the label "Permanent Fund," so it has been politically untouchable. Perhaps House lawmakers believe the earnings reserve won't be untouchable if there is a financial catastrophe.

What's ironic here is that the Permanent Fund is the more appropriate candidate for converting into an endowment. Many civic groups and financial experts have recommended using the 5 percent rule to manage Permanent Fund payouts. Doing so would automatically inflation-proof the fund, since it has consistently earned much more than 5 percent. Alaskans would no longer have to rely on the Legislature to inflation-proof the fund each year.

Because Alaska relies on a single, volatile commodity to fund most of its yearly budget, we need a multi-billion-dollar reserve ready at hand. The Legislature should keep the budget reserve in its current form.

BOTTOM LINE: The state's budget reserve should remain a budget reserve.

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