The unprecedented budget shortfall that we are facing is the direct result of fluctuating global oil prices, dropping oil production, and spending too much.
Some folks say Alaska needs to "right size" government before we start to discuss the possibility of additional state revenue. I don't agree: it is our responsibility to find government efficiencies just as it is also our responsibility to consider new revenue sources when facing deficits of such magnitude. The Legislature will need to prioritize what state services we can and should provide, and stop paying for programs that we cannot afford.
What is the "right size" of government? Our Alaska Constitution says the Legislature must pass an operating budget to fulfill all the "shall provide for" clauses throughout the constitution. It is traditionally understood that the "operating budget" is the only bill we are required by the constitution to pass, and that it has to be "balanced" because we, unlike the federal government, don't have the ability to print our own money. We have one-time savings that can be drawn down to meet spending requirements and, unless oil prices rise dramatically, those savings will likely be used in the near term to make up the budget shortfalls.
We have to find solutions to our $3.5 billion per year shortfall, because that is how far our budget is out of balance. How long will our limited savings accounts last? The Statutory Budget Reserve is $2.2 billion. The Constitutional Budget Reserve is $11 billion. At our current spend rate and with an expected shortfall of $3.5 billion, our savings will not last beyond FY 2017.
It would be irresponsible for Alaska's elected leaders to wait until our savings are drained before we put new revenue-generating programs on the books. And we cannot count on the price of oil to save us. It's dropped from over $110 to under $50 in the last six months. It could well rise to $60-65 by the end of the year, or go to $10-20 and stay there awhile. Clearly, we do not know the future price of oil with any certainty.
We need to diversify our revenue stream during the coming years. Yet, in today's oil price environment even if we had an Alaska LNG export gas pipeline in place and producing the revenue optimistically projected to be $2 billion per year, we would still be in deficit spending. Also, this current world oversupply of oil and natural gas do not argue for counting on gas line revenue to begin for a very long time.
Going forward, we should consider the following:
• Utilizing the income of the Permanent Fund, through a percent-of-market-value (POMV) or endowment management, with a portion dedicated to dividends and a portion dedicated to state government operations.
• An increase in the motor fuel tax, which, at 8 cents per gallon, has not been increased in 50 years. At the current level, the tax raises just under $40 million annually.
• A flat education tax similar to one Alaska had until the 1980s, which could raise $40-160 million, depending on the rate, which could be directed to K-12 costs.
• A statewide sales tax, which could raise $300-400 million, with provisions to accommodate local governments that already have a sales tax.
• An income tax, which could also raise $300-400 million, but punishes production and entrepreneurship, so this should be a last option.
Any new source of revenue should be designed with a trigger that turns it on or turns it off, based on the balance in the SBR and the CBR. It should also be designed to allow the maximum of net revenue collected relative to the cost of collecting it. In this regard, a POMV formula that simply moves money from Permanent Fund earnings to the general fund would not require the state to hire hundreds of new employees, as a new statewide tax would do.
One danger we have to be careful to avoid at all costs is the injection of fear into Alaska's economy. We must avoid triggering an exodus of people moving out of state, like we saw in the mid- to late-1980s. An important part of the discussion of right-sizing state government should include looking at how necessary a certain level of state spending is to maintaining a viable economy.
Along with the element of fear to be avoided is the need for Alaska to continue to attract investment. If we are perceived as an economy in steep decline, investors will go elsewhere to find more positive opportunities.
The state of Alaska currently enjoys a triple-A credit rating, and I want to maintain that rating, especially as the state and its producer/partners move forward toward construction of a gas pipeline. This will be the largest civil construction project to date, and will require a lot of debt. If we do not maintain our triple-A rating, we will be forced to pay a premium for debt, thereby lowering our net return to the state on the project. And, draining our savings accounts without a discussion of revenue is not a positive sign to the credit rating agencies.
As a wrap-up, let's suppose the price of oil goes lower or simply does not rebound to a level that supports our current level of state spending. What do we do? The answer will not be easy on Alaska's residents. But right now is the time to start that conversation.
We need to carry this conversation into the interim with a task force made up of legislative, administrative and public members to hold a frank discussion of where we are with our budget and revenue picture, what is the right size of government, and how we get to a sustainable level of revenue that matches Alaska's basic needs. Answers we need before the start of the next session.
To paraphrase the late Sen. Ted Stevens, let's not worry so much about getting re-elected and do what's right for Alaska. Because, let's be realistic -- the oil fairy may not show up to bail us out this time.
Sen. Click Bishop, R-Fairbanks, has served in the state Senate since 2013.