Alaska’s toughest budget choices are yet to come

When it comes to financial matters, the people who know the numbers often speak quietly. But when they speak up, we're well advised to listen. And when they release a report warning that we could exhaust Alaska's primary savings accounts in two years, we need to take it seriously. The Legislative Finance Division's recently released informational paper reinforces a central budget truth that many political candidates haven't confronted in speaking to voters: The state isn't out of its fiscal trouble, and most of the work done so far has been stage-setting for the hardest choices yet to be made.

During the past three legislative sessions, Alaska's lawmakers have slowly made progress toward closing the state's massive budget deficit. The fiscal gap reached as high as $3.7 billion after oil prices — and thus production tax revenue — collapsed in late 2014 and 2015. Since then, a steady march of state budget cuts and a slow oil price recovery have reduced the deficit, but lawmakers have strenuously avoided dealing with the greater debate of further reducing state services or providing for them structurally through revenue measures. The percent-of-market-value bill that passed the Legislature this year, capping Alaskans' Permanent Fund dividends at $1,600 apiece and diverting a greater percentage of fund earnings to state coffers, came the closest to a budget solution of any attempt yet. But it still left a $700 million gap, and many Alaskans chafed at the dividend reduction.

In the long term, economic growth is the solution Alaska needs. But in the short term, there's precious little runway with which to work. If oil prices stay relatively high, the budget gap could be lower than $700 million when legislators convene in January. Our leaders need to pull on Alaska's economic levers, but in a measured way that does the least economic harm in the short term and allows the economic recovery to proceed.

Because it's an election year, candidates are loath to level with voters that there's no easy way out of the budget plight. But the truth is, there are only three distinct paths to a balanced state budget that doesn't rely heavily on the ever-shifting price of oil:

1. Spending cuts that diminish state services deeper than anything Alaskans have yet experienced.Even if the percent-of-market-value plan that caps the payout of Permanent Fund dividend remains in place, the state will face a budget shortfall of $700 million. That’s twice the state budget for the entire University of Alaska system, or more than five times the budget for the Alaska Marine Highway System. If the state’s fiscal forecast is accurate, it’s near impossible to imagine how the math could be done in a way that didn’t result in tangible reductions in services Alaskans depend on, such as public safety, education, health services and transportation. And if the PFD cut is reversed, the math is even more daunting.This isn’t to say there aren’t places where cuts can still be made, or that all of the state’s money is being well spent. Alaska’s state spending is roughly $9,000 per resident, second among U.S. states (Wyoming is first) and well above the national average of about $4,800 per person. That spending level, when viewed alongside Alaska’s lagging educational outcomes and public health woes, certainly requires serious scrutiny. Of note, Alaska is also the only state where more than $1,000 of that sum each year is being paid directly to residents in the form of a check – which brings up the next option.
2. Dramatic reduction or elimination of the Permanent Fund dividend.The Legislature and Gov. Bill Walker came far closer to a balanced budget this year than any time since the budget crisis began, but they did so by reducing the amount paid directly to Alaskans and using that money to help fund state services – a sort of de facto head tax without the paperwork. And the move didn’t come without controversy: Many Alaskans were upset that the cut was effectively a tax that took as much from those with little to no other income as it did those with six-figure salaries.And the hardest truth about the dividend cut was that this year’s reduction wasn’t enough to balance the budget, and a larger draw from the earnings reserve while continuing to pay a substantial dividend would eventually exhaust the account, meaning no dividends and reduced ability to pay for state services. If the earnings reserve is to remain the only source of funds to balance the budget, at current spending levels, it will mean a far smaller dividend for residents – perhaps the end of the dividend altogether.
3. The T-word: Taxes.Since 1980, Alaska has had no personal income tax or a statewide sales tax; it has relied on production taxes from oil for the vast majority of its revenue. Although there is reason to be optimistic about new fields on the North Slope, the state is transitioning out of the economic era in which residents get a free ride from the oil bounty — which, even in the best of times, was prone to boom-and-bust cycles that left legislators scrambling to cobble together budgets in lean years.Some legislators have pushed to reopen the idea of raising oil taxes; most are rightly reticent to get back into a bitter fight that could affect future investment in the state’s dominant industry. And taxes would likely stall economic progress as the state grapples with its highest-in-the-nation unemployment rate and a still-sluggish economy. Covering the fiscal gap with new taxes of whatever kind would impact Alaskans’ personal finances, and that hasn’t happened in almost four decades.

Those are the options. They are the only options, and they all have drawbacks. If political candidates try to convince you they can move the state forward without hefty tugs on at least two of these three economic levers, ask to see their math, and make them explain it to your satisfaction. A qualified candidate will know the numbers cold. We're facing a serious choice about the fiscal future of Alaska, and you deserve honest, straightforward answers.

The views expressed here are those of the Anchorage Daily News, as expressed by its editorial board, which welcomes a broad range of viewpoints. Current editorial board members are Ryan Binkley, Andy Pennington, Julia O'Malley, Tom Hewitt and Andrew Jensen. To submit a piece for consideration, email commentary@adn.com. Send submissions shorter than 200 words to letters@adn.com or click here to submit via any web browser.