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Sen. McGuire: Alaska's budget, its oil, and its Permanent Fund

  • Author:
  • Updated: June 29, 2016
  • Published June 4, 2015

As the Legislature struggles with this year's budget, some Alaskans may assume lawmakers are not considering the overarching financial issue: a fiscal gap projected to continue for the next few years. I assure you this is not the case. That's why I am proposing a long-term solution to the state's vulnerability to volatile oil prices. As you know, oil accounts for over 90 percent of the state's unrestricted general fund.

In the early 2000s we faced a similar revenue shortfall, albeit smaller than this one. Then, low oil prices accounted for the gap. More than a decade later, we have a two-headed monster contributing to the gap: low oil prices and less oil in the Trans-Alaska Pipeline System.

The Legislature has cut almost $1 billion from the budget this year. We will continue to look for more efficiencies, but we cannot cut our way out of this. Several familiar ideas, like cuts, or new taxes and fees, have been discussed over the last six months to deal with the state's revenue decline.

But I would encourage Alaskans to think outside the box for new ways forward. What if Alaska was not dependent on a single source of revenue? What if the state's fiscal situation was dictated, in part, by nimble investments rather than the price of a single commodity? What if we allowed our vast cash reserves to work for us rather than sit in "rainy day" accounts?

Alaskans cannot control the price of oil. However, Alaskans -- whom I believe to be intelligent thoughtful visionaries -- can control where and what we invest in.

In April, I introduced Senate Bill 114. It won't completely get rid of a $3.9 billion deficit, but would result in cutting the deficit in half. SB 114 changes where the funds for the annual dividend come from and what funds are available for government services. It is not a raid on the Permanent Fund, and it would reduce the need for new taxes.

Currently, 25 percent of all royalties and rents from oil and gas and federal mineral revenue go into the Permanent Fund. According to the Department of Revenue's spring forecast, the total expected income from all royalties is just over $1.5 billion, which means about $380 million will go into the fund. The Public School Trust Fund receives 0.5 percent. That leaves 74.5 percent of all royalties, $1.12 billion in fiscal year 2016, to go to the general fund.

Instead, SB 114 would utilize that 74.5 percent to pay the dividend. According to modeling done by the Legislative Finance Division based on last year's number of accepted applications, if the plan were in place today, each dividend would be about $1,700. The bill also stipulates that the dividend amount would not fall below $1,000 but would remain separate from the fund.

Instead of royalties, the general fund would utilize a portion of the Permanent Fund. Five percent of the value of the fund, based on a five-year rolling average, would be deposited into the general fund. The 5 percent idea is derived from a Percent of Market Value concept that has been floating around for several years. This 5 percent would go directly into the general fund and depending on the final formula, this would be a net increase of between $1.6 billion and $2.1 billion. Typical returns on the Permanent Fund's investments average more than 5 percent, so this formula should not diminish the overall value of the fund. The earnings above 5 percent and the 25 percent of royalties would ensure the fund continues to grow.

This bill does three things I think are important to all Alaskans: it protects the fund, ensures a dividend, and cuts the deficit in half. But it also empowers Alaskans to chart our own financial destiny. While oil and gas will continue to be vital to Alaska's economic future, I think it is time for our money to start working in smart ways for us.

In April, Alice Rogoff, owner and publisher of Alaska Dispatch News, published a commentary titled, "Alaska need not suffer; let's leverage our wealth to thrive." Her idea was to leverage Alaska's cash reserves to borrow against at low interest rates, while investing those borrowed funds to realize higher returns, thus creating a new revenue stream. While I agree that Alaska must start using our cash reserves to create "smart money," her plan needs some refinement. However, I applaud the idea. If done correctly, SB 114, together with the leveraging, could put Alaska on sound financial footing regardless of oil prices. Oil revenue then would be a bonus, not a necessity.

Both of these plans depend on investment returns from the market. Mechanisms such as five-year averages allow us to capitalize on bullish markets while protecting ourselves in a bear market. It is the nature of markets to fluctuate, just as it is the nature of a commodity price to fluctuate. The question we need to ask ourselves is: Which direction is preferable -- setting our own heading and making our own investment decisions, or having those decisions made for us?

This weekend, the governor will commence a fiscal policy discussion in Fairbanks where people will bring many ideas. I am excited to hear what Alaskans think as we create a new path forward. It is time for these conversations.

Sen. Lesil McGuire is a Republican who has served in the Alaska Legislature for the past 15 years representing South Anchorage.

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.

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