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Business/Economy

Economist: Alaska faces the choice 'to become more like other states'

  • Author: Annie Zak
  • Updated: June 23, 2016
  • Published February 1, 2016

As lawmakers in Juneau try to come up with solutions for Alaska's massive $3.8 billion budget deficit, one economist is encouraging people to educate themselves about what's driving that shortfall.

Gunnar Knapp, professor of economics and director of the Institute of Social and Economic Research at the University of Alaska Anchorage, spoke with urgency to a room full of concerned business leaders at an Anchorage Chamber of Commerce event on Monday, emphasizing the importance of understanding the different pieces of Alaska's financial situation before focusing on what solutions might be.

"I think this fiscal challenge that we are facing is the perfect storm," he said. "It's critically important. It's also very complex. We have very little time to address it. … It demands of all Alaskans that we become informed about our fiscal reality."

Among key factors in the state's shortfall are the fact that Alaska has long relied on oil for generating revenue, and now the oil market is changing dramatically. There is a glut of oil as growth in demand for it is slowing.

Knapp's other message was that the state government needs to utilize all possible options at its disposal, and act quickly to solve the problem.

Gov. Bill Walker's budget proposal includes an income tax, budget cuts and a restructuring of the Permanent Fund -- which would result in smaller dividend checks to residents -- to balance the state's checkbook.

Without backing a specific proposal, Knapp said Alaska lawmakers will need to consider five different factors: what Alaska spends on the government, what it spends on Permanent Fund dividends, what new tax revenue the state might add, how to inflation-proof the Permanent Fund and what other growth the state might have in the Permanent Fund earnings reserve and the Constitutional Budget Reserve Fund.

"Our choices that we face are not between any two of these," he said. "Our choices are between all five."

It's also key that Alaskans not rely on the possibility that oil prices might reverse course, he said.

"He was very realistic, that we can't be hopeful that the tide is going to change," said Bruce Bustamante, president of the Anchorage Chamber of Commerce, referring to hopes for oil prices to start rising again. "We don't know that for sure. Really the gist of (Knapp's) message in that area was, we need to act now."

Despite the grim nature of Knapp's lecture on Monday -- he noted how a longer delay in fixing the deficit is "poison for investment" and will only further damage the state's credit rating -- it ended on a hopeful note.

In many ways, he said, the process of fixing the state's budget will end with Alaska simply looking a little bit more like other states.

"Our fiscal options are not so bad compared with most other states," he said. "This is completely doable. … Most other states have no oil earnings at all. No other state has a Permanent Fund. No other state pays Permanent Fund dividends, which is why most other states spend much less for government, have income taxes and/or sales taxes, don't pay dividends and don't accumulate wealth every year in a Permanent Fund. And the choices that we face are, in some way, to become more like other states."

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