Alaska’s new fiscal reality

With the collapse of oil prices and steep decline in revenue, Alaska has exhausted all savings except the Permanent Fund itself. Based on current oil price projections, we will have a budget deficit in the foreseeable future even if we pay a $0 Permanent Fund Dividend after this year. Even before the COVID-19 economic cataclysm, Alaska was reliant on earnings from the Permanent Fund for most revenue. With extremely low oil prices, we are now almost entirely reliant on stock market returns in coming years. Alaska has never faced such dire budgetary circumstances, and we have essentially two options of how to proceed.

The first option is superficially appealing and economically devastating: Start draining the Permanent Fund earnings by violating the Percent of Market Value (POMV) statute. If the Permanent Fund shrinks, so too will its ability to fund our basic public services such as police, public schools and transportation infrastructure. Overdrawing the Permanent Fund earnings beyond the statutory limit of 5% would lock Alaska into a fiscal death spiral: An ever-smaller Permanent Fund would generate ever-smaller returns, which would result in ever-larger budget deficits. Every billion dollars spent from Permanent Fund earnings means $50 million less in operating revenue next year. The result? Out-of-control crime, broken school systems and rapidly shrinking property values, which would cripple local governments’ ability to blunt the impact of rash state policy decisions.

The second option requires discipline and a willingness to stand behind uncomfortable truths: Protect the Permanent Fund itself, honoring the 5% maximum draw that is in statute today. To do so, we will have to simultaneously keep public services lean, raise substantial new revenue, and probably forgo PFDs for multiple years in the future, potentially indefinitely. If we can be disciplined, we will likely have just enough earnings from the Permanent Fund, new revenue and traditional oil revenue to keep our streets safe and our schools in decent enough condition to continue attracting and retaining skilled, high-earning professionals that we need for economic stability.

Prior to the COVID-19 crisis, our fiscal challenges were daunting, but not an emergency. Not any more: Entering fiscal year 2021, our Constitutional Budgetary Reserve will be below $500 million, a perilously low figure that leaves us at risk of being unable to pay bills.

As a result, next year the Legislature will have to raise revenue — at least $500-$600 million — requiring either an income tax or sales tax. If oil prices rebound significantly, higher oil taxes could blunt the impact on individuals, but prices in the $30s preclude meaningful additional oil revenue in the short term. The Legislature will almost certainly not be able to fund a Permanent Fund dividend next year. At a cost of $680 million for a $1,000 dividend, and with hundreds of millions of dollars in operating budget deficits, there will be no way to pay for it unless we generate more than a billion dollars in new revenue, which is essentially impossible in this economic climate.

Some demagogues will claim massive operating budget cuts are possible. Anyone who’s paid attention to the budget knows this simple reality: Our operating budget of $4.7 billion is lower than any time in the past decade, even before adjusting for inflation. Taking into account inflation and population, our budget is as low as it’s been since the late 1970s. In other words, we’ve axed the budget already. Nearly all the other cuts left require forgoing orders of magnitude more funds in federal matching dollars, meaning that ever state dollar cut has a disproportionate negative ripple effect on the state economy. In a state that has always been dependent on public investment, giving up federal match is economic suicide.

Does this situation sound bleak? It may be, compared to the recent past. But consider this: Back in the 1950s, when Americans from all over moved into Alaska, we had nothing: No oil revenue, no tax base and essentially no infrastructure. People moved here because Alaska symbolized hope, and because Alaskans believed the future could be bright.

Today, we are much wealthier than before statehood, with the largest sovereign wealth fund of any state. That means we can absolutely build a prosperous future, but only if we protect the Permanent Fund and its earning potential. Earnings from the Permanent Fund will be what allow us to still have good schools, safe streets, high wages, low inequality and higher quality of life than nearly anywhere else in America. The Permanent Fund will be the bedrock on which we rebuild our economy after this economic cataclysm. If we can live within the POMV statute and protect the Permanent Fund this year — which we did with the budget that just passed — I am confident we can maintain such discipline in future years and ensure a prosperous future for our state.

Zack Fields, D-Anchorage, represents Fairview, Government Hill, South Addition, Downtown and Eastridge in the Alaska House of Representatives.

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