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Here’s how the state’s fiscal gap could affect your finances

  • Author: Charles Wohlforth
    | Opinion
  • Updated: September 27
  • Published September 27

After my last column about the economy I exchanged emails with a reader who, like many Alaskans, fears disaster from the state fiscal gap. People are worried about their communities and their own financial well-being.

When we were done, he wrote, "I mistakenly thought we were toast. Put this in a column. Use plain language. Boil it down so even an idiot like me can understand it. Thanks for the explanation."

This guy is far from an idiot, and it struck me that a lot of people may be more fearful than they need to be.

As I explained in my last column, oil prices dropped by about half, taking about $10 billion out of a $60 billion Alaska economy. Using round numbers (as I will throughout this column), more than $3 billion of the disappearing money had been funding Alaska's state budget.

The economic damage from the loss of the $10 billion is locked in. Lower prices came about because of technology that reduces the cost and increases supply of oil, which will not change.

But the smartest economists think we are more than halfway to shrinking our economy to match the reduced money coming in.

If you haven't lost your job, you probably won't. If you do, and you have to leave Alaska and sell your home, you probably won't lose all the money you put into it. This recession wasn't driven by real estate and home prices haven't gone underwater, for the most part.

But what about the $3 billion state spending gap?

The Legislature has cut spending substantially — that's a reason for the economic hurt we are already feeling — but an imbalance of about $2.4 billion remains. So far, the state has funded the shortfall from savings accounts that are now almost empty.

If the state government took the rest of that money from the economy, either through spending cuts or new taxes, we would have a horrific additional economic drop ahead of us.

A state spending cut of $100 million costs the economy more than 1,000 jobs, according to a study by the University of Alaska Institute of Social and Economic Research. Balancing the budget by cutting alone would cost more than twice as many jobs as we've already lost in this recession.

But that won't happen because we have the Alaska Permanent Fund. Its earnings have never been used for anything but reinvestment and paying Alaskans dividends. Using the earnings now can bridge most of the rest of the gap.

The fund receives corporate dividends and interest and its investments are sometimes sold for a profit. Under the Alaska Constitution, the original investments, also called corpus or principal, cannot be spent, but the income can.

For the economy, that money spends the same as oil money.

Oil money comes from gas pumps around the world. Permanent Fund earnings come from Wall Street. Either way, the money enters Alaska from elsewhere, so it contributes to our basic economy.

The fund is worth $61 billion. The investments, or corpus, are $40 billion. Another $7 billion is profit in investments that haven't been sold, so that money will someday be spendable but isn't immediately available.

The rest of the fund, around $14 billion, is in an account called the Earnings Reserve, available for appropriation by the Legislature at any time.

Of course, if Alaska spent all that money, we would again face the fiscal gap we have now without a way to bridge it. But the earnings reserve is constantly replenished by investment earnings. We can spend some of it annually without the account ever going dry.

To look at this another way, at the same time the Legislature has drained its other savings accounts, the Permanent Fund has made most of that in gains.

Of course, investments also fall in value. A sustainable draw on the Permanent Fund would have to remain low enough to be sustainable long-term, leaving enough reinvestment to cover inflation.

Experts agree that withdrawing 4 percent annually would be sustainable.

Using 4 percent of the $61 billion fund would yield about $2.5 billion a year. Subtract a $1,100 dividend paid to every Alaskan, which costs about $700 million, and you have $1.8 billion left to spend on the budget.

Recall the deficit is currently $2.4 billion. That drops to $600 million.

It's still a lot of money, but comes within our reach. We have several options.

Cutting the budget by $600 million would create maximum economic pain. But the Legislature has proved unable to make big additional cuts, so that probably will not happen.

Raising taxes on the oil industry by $600 million would cause an unknown amount of economic damage. Certainly, increasing the cost of operating here could affect investment decisions, but we don't know how much.

The Legislature already cut the dividend by more than half. Getting rid of the rest of it would bridge the gap. But the cost would be high in jobs, harm to lower-income Alaskans and take away the constituency for the fund itself. The dividend does Alaska a lot of good.

A broad-based tax (income, sales or property) could raise $600 million with less economic damage than spending or dividend cuts, according to ISER's research.

I have my preferences, but the option legislators choose is less important now than having them choose an option. Alaskans need an answer so we can move on.

Inaction and uncertainty buys us much of the economic damage of all the choices.

Alaskans are scared and making life decisions based on uncertainty. Business people are holding their money on the sidelines. They can't invest without knowing what will happen next. Oil companies don't know if their taxes will change.

Until the Legislature makes up its mind, fear itself will delay an economic recovery. That's the cost of the "muddling through" option used for the last two years.

Alaskans are weary and disappointed in our leaders. We need a decision.

The views expressed here are the writer's 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. Send submissions shorter than 200 words to letters@alaskadispatch.com or click here to submit via any web browser.

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