Alaskans, we better wise up before we burn through our savings

The precipitous drop in oil prices has created an unimaginably large $3.5 billion "deficit" in the $6 billion state budget. So far we're trying to cope through moderate spending cuts and huge draws on the $10 billion in the Constitutional Budget Reserve. But at a spend rate of $10 million a day, the CBR won't last long before we're looking over the fiscal cliff.

New sources of revenue like an income tax or diversion of the Permanent Fund dividend would extend the life of the CBR and help maintain necessary public services. But there is little interest in undertaking a contentious discussion of new revenues while we still have cash in the CBR, and hope springs eternal that we'll be lucky and the price of oil will bounce back up higher than ever and save us -- again.

In the face of this uncertainty and political gridlock, our "fiscal plan" is the path of least resistance. It looks like this: First, we will cash out the CBR.

Then we will look to the $10 billion of spendable cash in the Earnings Reserve of the Permanent Fund. In preference to budget cuts or new revenue sources, we will spend it.

Then we will look to the annual earnings of the Permanent Fund not allocated to the dividend or inflation proofing. We will spend it.

Then we will look to the annual Permanent Fund deposit for inflation proofing. We will spend it.

Then we will ask the Permanent Fund managers to cash out the unrealized gains. We will spend them.


When all this cash is gone we'll finally look to the corpus of the Permanent Fund, maybe for a loan. But there won't be much left even to pay the dividend, since we'll have raided the cash needed to maintain and feed the Fund's growth, just when we will most need it.

But we don't have to go down that path. If managed properly, income from Alaska's assets -- oil revenues and earnings from all our financial accounts (including the Permanent Fund, which was created to take over the support of public services from declining petroleum revenues) -- can sustain both a $2,000 dividend and a stable and predictable state budget of about $4.5 billion, growing with inflation and population, long into the future.

Recasting our fiscal structure in this way gives us a clear and manageable target to work toward -- the $4.5 billion sustainable budget. And the strategy that opens that path is straightforward.

First, take discussion of changing the dividend or imposing new broad-based taxes off the table. Concentrate on incrementally trimming the budget in the direction of the spending target. Fund the budget with current revenues and only that share of financial asset income we don't need to save to maintain the value of state assets. Most important, rationalize management of all state financial assets, to maximize their long-term sustainable income potential.

And finally, entertain the possibility of new revenue sources only if and when budget cuts down to the target become impossible and only after the disciplined use of the earnings of financial assets has been firmly established.

A clear target and strategy will instill confidence in the public and the business community that there is a solution to our fiscal challenge.

The administration, the Legislature, the business community and all Alaskans need to get behind the task of charting a new path away from the fiscal cliff.

Scott Goldsmith is professor emeritus of economics at the University of Alaska Anchorage and former director of UAA's Institute of Social and Economic Research.

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.