There is a silver lining to the massive deficit Alaskans are facing. Out of the adversity of balancing the budget we will redesign our fiscal structure away from dependence upon fluctuating oil revenues. The additional good news is that there is a sensible solution to balance the budget and we have the resources to do it. The key to achieving this is for the Legislature to recognize the urgency of acting now. Let me explain.
To many, Alaska's nearly $3.7 billion deficit is a mind-boggling number that foreshadows an imminent economic recession, a dramatic increase in taxes, high unemployment, elimination of the Permanent Fund dividend, and deterioration of essential services.
Thankfully, we can reduce a significant majority of our budget deficit by using the earnings from our three savings accounts. The Permanent Fund, the Permanent Fund Earnings Reserve and the Constitutional Budget Reserve total approximately $57 billion. Using only the earnings of these accounts, 5 percent of the total value of these funds, would make approximately $2.9 billion available to reduce nearly 75 percent of the deficit while still inflation proofing the principal.
After this step about $800 million from a combination of cuts and revenues would be required to balance the budget. Once the Legislature finds the right mix of these policies, we will have a long-term sustainable budget -- something that has eluded us for decades.
This course of action will result in lower Permanent Fund dividends. Yet, taking no action would cause our Constitutional Budget Reserve to be depleted in less than 18 months. Our Permanent Fund earnings reserve, which funds the dividend, would be gone in two additional years. That would be the end of the dividend. Using the earnings from our savings accounts will assure sustainable, albeit leaner, dividends.
There will have to be cuts. With the largest expenditures by far being education and health care this will present a serious challenge to preserving essential services. Taxes, both corporate and personal, will also have to play an important part of finding the right balance.
With this three-pronged approach all of the stakeholders will have contributed to a solution, acknowledging that, indeed, we are all in this together. An economic train wreck will have been avoided. Our enemy is not people who have differing ideas of policy. Our enemy is the status quo -- doing nothing. Without change we will very soon squander forever the only responsible option we have. Using earnings from the Permanent Fund and other savings, because of its magnitude, must be the cornerstone of any viable policy to balance our budget.
When we think about the purpose of the Permanent Fund when it was established in 1980 this solution makes perfect sense. At that point in time the Legislature, the governor, and the overwhelming number of Alaskans who voted for the constitutional amendment creating the fund, knew that we had to save money for future generations. Creating a constitutionally protected fund that would grow by dedicating a continuing percentage of resource royalties was the right answer. Everyone knew that some day oil revenues would no longer pay the entire bill. That day has come.
We will reach this landmark solution only by coming together to meet the most significant challenge to our prosperity since statehood. And by turning to the earnings from our savings as the primary source for achieving a long-term, sustainable balanced budget, we will have validated the wisdom of the generation that created that asset. No other state in America can match this accomplishment.
In 1968, after school and the Army, I started out in Alaska, working on the second well drilled on the North Slope after the Prudhoe Bay discovery well. As a roughneck I was making less than $5 per hour. The first paycheck each year had a payment for a state school tax and the Fairbanks Flood recovery tax and there was a state income tax.
No one ever dreamed of a dividend. Life was pretty gritty, but everybody felt that Alaska was the place of hope and opportunity. Having raised our family here in Alaska, starting businesses and spending several years in public service, Susan and I are profoundly grateful to live in Alaska.
This is our moment in history. Our legacy will be providing a future as full of hope and opportunity as the one that we inherited.
Tony Knowles is a co-chair of Alaska's Future. He served as mayor of Anchorage from 1982 to 1988 and governor of Alaska from 1994 to 2002.
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