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Endowment plan for Permanent Fund would add stability to chaotic budget

  • Author: Dermot Cole
  • Updated: September 28, 2016
  • Published October 30, 2015

In the early days of the Alaska oil boom, as the late Rep. Hugh Malone of Kenai once said, Alaska legislators found it easy to agree on appropriations.

''There was a sense that there was enough money to do everything,'' said Malone, an early champion of the Permanent Fund who later served as revenue commissioner. ''You didn't have to fight with anybody -- you just said yes."

Malone knew there would never be enough money to do everything, though that illusion has been a recurrent theme in Alaska politics every time that oil prices have spiked, only to be followed by a fall.

This time the cycle looks different. Oil production is down by 50 percent over the last 15 years, while oil production taxes are down by 95 percent since 2012, mainly because of the oil-price collapse. Alaska can either pray for a miracle or face the facts.

A pivotal event in the transition to reality occurred Wednesday when the Walker administration presented a plan that would base the annual state budget not on oil revenue, but on investment income. Moving away from the international oil roller coaster would end a nearly 40-year habit of basing each year's spending decisions on the current oil price.

While the budget process would remain subject to annual action by the Legislature, incorporating the $50 billion Permanent Fund into the solution in a deliberate manner is one step that may allow the fund to survive over the long run.

Over the last 30 years, Alaska's business and political leaders have proposed using Permanent Fund earnings to help fund the state budget every time oil prices have collapsed. But then someone like Joe Hazelwood would come along, triggering a multibillion-dollar Exxon Valdez cleanup campaign, or tensions would flare in the Middle East and oil prices would rise, adding dollars to the treasury.

The latest price dive, due in no small part to the Lower 48 boom in shale-oil development, presents a more difficult budget challenge than any in the past. What's changed is the scale. Close to 60 percent of the state operating budget this year will be funded not by taxes, but from savings. There is not enough money to do everything.

Oil prices would have to more than double to balance the budget this year. Anything's possible, but that's not likely. Savings stashed outside the Permanent Fund are shrinking and within three years, the state will be forced to go to Permanent Fund earnings to cover the budget, even if we also adopt new taxes, oil taxes go up and budget cutting continues.

In joining previous Alaska governors in proposing the use of Permanent Fund earnings, Gov. Bill Walker has offered a proposal to shift most annual oil income into the fund and use it as an endowment that would cover most of the state budget. It would not close the budget gap entirely, so we're going to need more budget cuts and taxes.

The Permanent Fund would be the foundation of a new system under the Walker plan, which has key elements in common with a bill proposed earlier this year by Anchorage Sen. Lesil McGuire. While both proposals are cumbersome and include a plan for paying dividends that owes a lot to Rube Goldberg, the important thing is to recognize that a dramatic adjustment is needed to replace our broken budget.

The details and dollar figures will change as they are argued and amended, but the process will serve a vital purpose by bringing the overwhelming financial imbalance in Alaska to the forefront. Spending cuts alone are not a solution and there is more at stake here than the size of the dividend -- it's the future of the Alaska economy.

As Attorney General Craig Richards finished outlining the endowment plan in Juneau, the very first question from a legislator was: How would this impact the Permanent Fund dividend?

The answer, befitting the recognition that there is not enough money to do everything, is that it would cut the amount to about $1,000. That would still mean spending about $700 million on dividends, one of the largest expenses of state government.

I can hear the objections already, but there ought to be room for compromise. While there will be little enthusiasm in Juneau or elsewhere for a plan to cut dividends, there will be even less for any of the budget alternatives once those are examined in detail.

With the state collecting $2 billion in oil revenue and withdrawing $3 billion in savings to fund a $5 billion operating budget, something has to give.

Cutting the budget by $500 million or $700 million has been cited by legislative leaders as the only option they want to discuss in 2016. Cuts of that magnitude will remain popular only until they are identified. But if they are enacted, we still need a $2.5 billion solution and the legislative approach doesn't cut it.

A balanced approach that includes spending cuts, higher taxes, new taxes and transforming the Permanent Fund into an endowment is our best bet.

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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