Bill Walker is a brave man. He plans to expand Medicaid, the state-federal health care program for low-income Alaskans, by executive order. The move will be applauded by many Alaskans, but it will further strain difficult relations with the Republican-led Legislature, who oppose Medicaid expansion. Right now, however, Walker seems in pretty good standing with the public, while legislators' standing is at rock bottom after the debacle over the extended legislative session and the wrangling over the budget.
Now the governor plans to go where no Alaska politician has had the guts to go, at least in recent years. Later this year he will propose a package of new revenue measures, including possible new taxes and some use of Permanent Fund earnings. Critics will call this naive, that the governor is still new at his job and has yet to confront the kind of intense public reaction these ideas may engender. But Walker is showing leadership, so let's credit him for that.
Our budget situation is indeed dire. Revenues are less than half of what we're spending, even after the budget cuts legislators made this spring, and let's credit them for that. Legislators too went where few politicians have the guts to go in cutting the operating budget, which has been rising for years.The revenue hole is huge, though, and oil prices appear to be declining again, not gradually increasing as forecasted. Simplistic solutions to this problem won't cut it.
Cutting spending won't do it. We could fire all state workers, close down schools and the university and we'd still have a problem. Plugging the hole by raising oil taxes won't cut it either. We've gone down that road before, and last August Alaskans voted to follow a different path.
Frankly, we Alaskans are spoiled. We pay virtually no state taxes and we get a fat Permanent Fund dividend every year. All this is coming to a head, maybe quicker than we think.
As of July 1, the start of the state fiscal year, we had $10.1 billion in our Constitutional Budget Reserve, or CBR, our main liquid asset fund (this isn't the Permanent Fund, which can't be spent). Next year, on July 1, 2016, we'll be down to $7.4 billion, according to the state's Office of Management and Budget. Two years later, in 2018, we'll be down to zero in the CBR. That's according to the Legislative Finance Division.
We do have options, if we move soon. While the principal of the Permanent Fund can't be spent, the earnings can be. If managed like an endowment, the fund could bring a steady income of $2.5 billion a year or so, according to a revenue options white paper by the state Department of Revenue. We could take half of that income, or $1.25 billion, to support public services and the other half to pay the popular citizen dividend, which does help the economy. We could "cap," or limit the annual dividend at $1,250, for example. That could bring in another $600 million yearly, according to the revenue department.
A state personal income tax might bring in another $650 million or so, depending on how it is structured. This estimate, cited in the white paper, uses Rep. Paul Seaton's bill, now in the Legislature, as a basis. It is a state tax of 15 percent of federal taxable income. A different rate would produce different revenues. Other taxes, like one proposed for health care providers (every other state has a health provider tax) could bring in a few more dollars.
Continued spending reductions would have to be part of this equation, to get public buy-in to the revenue measures. Those could be done without wrecking the economy.
I'm not the genius putting these ideas forward. They came out of the governor's fiscal conference held in Fairbanks in June. A group of citizens wrestled with the budget problem over a weekend and came up with ideas very similar to these, as have previous citizen groups who have wrestled with this. There is now, however, a new urgency to this problem.
We would be irresponsible to dawdle for two years and let our ready cash reserves run down to zero, and the national credit rating agencies would certainly take note.
But there's real-life time and political time, which unfortunately guides things in Juneau. Next year is an election year, which means the chance of enacting difficult new revenue measures is about zero. The following year, in 2017, we'll have some new legislators, and possible new legislative leaders, and they will want time to settle in. More delay. Then comes 2018, another election year. But then the bank account is depleted.
There is, of course, money also in the Permanent Fund's earnings reserve, about $7 billion (allowing for this year's dividends and inflation-proofing payment to the Fund principal), but although this can be appropriated, it would be unwise to do so because it would narrow our options for using Fund earnings as an ongoing revenue stream.
This is not a pretty picture, but unfortunately it gets worse. If we are to really be a partner in a large North Slope natural gas project we've got to get our financial house in order. The present proposal is that the state will own 25 percent, and the industry is very supportive of that. But it means that we've got to come up with 25 percent of the financing, although it is possible, as is now proposed, that TransCanada Corp. could carry half of the state's financing burden as a partner in our share of the project. But even one-eighth of a $60 billion gas project is $7.5 billion.
Can we finance that? We certainty can if the project proceeds, but if our state is a pauper by the time the project go-ahead is given, 2018 under the current schedule, Alaska's credit rating could be in tatters. That will make it more difficult to raise our share of the gas project costs. This is important because we should look at the gas project as a long-term source of big revenues which could easily eclipse our current oil income, which is declining. Revenue measures we adopt soon are really a bridge to that. But gas revenues won't come until 2025, at the earliest.
Meanwhile, we've got to get from here to there. How to do that? That's the problem before Gov. Walker and the Legislature. To solve it, they need all the help they can get.
Tim Bradner is a natural resources writer for the Alaska Journal of Commerce. He writes a regular column for Alaska Dispatch News.