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Alaska's fiscal plight: So bad it's good, because lawmakers must act

  • Author:
  • Updated: June 26, 2016
  • Published January 13, 2016

I have become an optimist about our state's finances.

Here's why: Things are now so bad that our legislators finally have to do something. To do nothing will cause so much pain that it is, well, just inexcusable.

A journey like this, painful but necessary, requires a first step. The good news is that it's a step that's relatively painless politically, but substantial.

It's too bad that politics must intervene in such an important matter, but 2016 is an election year and in Juneau that frames reality, sad to say.

Here's our state's financial math, and it's grim: Spending is a little under $5 billion a year in state unrestricted funds (there is other state money but unrestricted general funds is shorthand way spending trends are measured). Oil and nonoil state revenue is $1.5 billion this year, again in unrestricted income. This is money legislators have discretion over in appropriations, which is what really counts.

The deficits are covered by withdrawals from the Constitutional Budget Reserve, but there's only enough for two more years of draw.

If we exhaust the CBR, we can go on to raid the Alaska Permanent Fund's earnings reserve account (unlike the Permanent Fund itself the earnings can be appropriated.) This could buy two more years. But then it's bye-bye citizen dividend because there won't be enough money. And then we're dead broke in four years. Not a pretty picture.

This is preventable. There are four steps we can take in a transition of our state's fiscal system to one that is sustainable. We don't have to do them in one year.

First is to continue spending reductions, although this has to be done with care or real damage will result. Second, we have to fashion an acceptable way to use Permanent Fund earnings, meaning a way that is sustainable, so the fund and its earnings are managed like an endowment. This is, after all, what it was set up for.

It's critical this step is taken this year and it's relatively painless politically because it doesn't take anything away from anyone.

Some argue this takes away some money that might be injected back into the principal of the Permanent Fund, thereby impairing some of its growth and benefits to future generations, but I think this is quibbling. Supporting state programs like education benefits future generations far more.

Third, at some point the annual citizen dividend will have to be capped, directly or indirectly. This will affect people (dividends will be lower) and it will be controversial. But if we don't do it soon, like next year (after the elections) the dividend will keep rising and it will prove more and more difficult to cap.

Four, we'll have to impose taxes at some point, because the first three steps won't cover the continued $3.5 billion annual deficits now expected, and no one expects oil prices to return to over $100 per barrel short of a war.

Some people think we should just raise oil taxes, but that's going backwards. Depending on oil put us where we are. Putting on new taxes will force Alaska's petroleum industry, already battered, into a downward spiral. Developing a natural gas pipeline will be pretty tough in those circumstances.

I'm encouraged now, however, because some legislative leaders, who have studied the math, have now agreed that we should take the first step in fashioning a way to tap part of the fund's earnings. It will make a significant dent in the deficit, and it will stretch out the remaining cash reserves. That gives our elected officials time to gather enough courage to tackle the more difficult decisions.

Agreeing to use some fund earnings is the really big step, but "fashioning" the way its is done will be the complicated part. The simplest and most transparent way to annually draw a certain percentage of the value of the investment fund but at a level that the funds would be sustained. This is how endowments operate.

There are other mechanisms, such as a fixed annual draw to support the budget, again at a level that leaves the investments sustainable.

What's interesting about all this is that while state oil revenues have plummeted, state's investment earnings, which are mostly from the Permanent Fund, are increasing smartly. When one looks at only oil revenues, things look bleak. When total revenues are considered, including investment earnings, things aren't so bad.

To illustrate: State unrestricted oil income dropped from $1.69 billion last year to a current estimate of $1.06 billion this year. Investment income, in contrast, rose from $2.63 billion last year to $3.79 billion estimated this year. Next year, investment earnings are forecast at $4.3 billion. So, why not use some of the investment earnings?

If our leaders lack guts and can't bring themselves to do anything, here's my scenario: State government mostly collapses with huge shocks to the economy; our bond ratings drop to junk status; school budgets drop to nil. Fisheries can't operate because there are no fisheries biologists (the Alaska Constitution requires sustained management, which requires biologists to figure out opening and closures of fisheries to set sustainable harvests.)

In that ultra-grim scenario I see angry citizens organizing a lawsuit to force the Legislature to fund schools (a constitutional responsibility) and possibly other vital public services as well.

We have experience with this. When the Legislature underfinanced rural schools a few years ago, parents sued and won a settlement. This could happen on a bigger scale, I believe, because amid the wreckage there are still huge untapped state revenue sources, including a billion dollars plus still being paid out in dividends.

It would be utterly embarrassing to have our state's financial affairs being managed by the courts.

Legislators had better tackle this problem, and this year. I believe they will. That's why I actually feel good about it.

Tim Bradner is a natural resources writer for the Alaska Journal of Commerce. He writes a regular column for 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@alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com or click here to submit via any web browser.

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