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Business/Economy

Permanent Fund can lower deficit while checks keep coming, economist says

  • Author:
  • Updated: September 28, 2016
  • Published April 23, 2015

A leading economist issued a paper Thursday arguing that the state can use a portion of the Alaska Permanent Fund earnings to reduce the deficit next year by $2.2 billion while still paying every Alaskan a full annual dividend.

There would also be earnings left over to reinvest in the Permanent Fund, currently valued at $54 billion after growing by $6.8 billion in 2014.

Scott Goldsmith said his plan could help Alaska weather a fiscal crisis brought on by the collapse in oil prices without the need for new taxes.

"The point is we have this other huge resource that we've been saving for years just for this purpose," said Goldsmith, with the UAA Institute of Social and Economic Research. "We should make use of it, and if we do that then we are not in the dire straits we appear to be."

The report comes with lawmakers on the verge of slashing hundreds of millions of dollars from the state's operating and capital budgets.

The search for new state revenue sources -- such as the first individual income tax since 1980 -- is expected to ramp up in the coming months. The governor plans to hold a fiscal conference this summer in Fairbanks to raise awareness about the state's situation.

Goldsmith suggests that using $2.2 billion of the earnings from the fund could reduce next fiscal year's estimated debt from $3.3 billion to $1.1 billion.

"Still a fiscal challenge, but a much more manageable one," the report notes.

Tapping the fund's earnings is considered politically difficult out of fear it will lead to smaller dividend checks.

The estimated size of the dividend for 2016, however, would remain the same, about $1,950, according to the report. Goldsmith said about $700 million would be available to invest back into the dividend.

Goldsmith would also use the Constitutional Budget Reserve, a separate savings account containing about $10 billion, in his plan.

Looking at the long term, the eight-page paper dusts off an argument Goldsmith has raised before, that fund earnings and other assets such as the Constitutional Budget Reserve can be used to provide sustainable income for many years to come.

Doing so would require lowering general fund spending by $1 billion, from the expected $5.5 billion in fiscal year 2016. The budget would remain at $4.5 billion but be adjusted annually for inflation and population growth, Goldsmith said.

Under that plan, the fund could continue to grow, he said. That would allow dividend checks to continue expanding at the rate expected by fund managers, to above $2,000 in 2017 and beyond, according to the report.

Of course, numerous variables could throw the plan off track, including the long-term performance of the stock market and oil prices or a sharp change in production.

"If it gets to be too much of a burden, then we have to look for a new revenue source," he said. "But the most important thing to do today is not look for a new revenue source, but to make total and efficient use of the revenues we have. And we can do that without a big debate of an income tax or a sales tax or cutting the dividend."

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