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Alaska will pay dearly if we don't act on budget now

  • Author: Alice Rogoff
  • Updated: July 5, 2016
  • Published June 14, 2016

Sometimes, a simple message gets buried under a mountain of important, but secondary considerations.

I want to highlight the basic arithmetic of "saving the Permanent Fund," and why we need Alaska's lawmakers to do it now:

Alaska's Permanent Fund today is valued at $52 billion. When added to our available savings accounts, the combined value of our cash assets is close to $60 billion.

That value will shrink to $56 billion by the end of this year, if the dividend and deficit is funded without changes. The annual earnings lost to the state of the status quo, higher-dividend distribution will be over $200 million. And over time, that loss compounds. That $200 million less every year means that over say, the next 10 years, the cost of the delay becomes more than $2 billion. It is like retiring a few months early and missing out on a higher benefits level, which could equal as much as foregone car payment every month. For Alaska, of course, it's vastly more than a car payment. It could mean cutting half of the University of Alaska budget every year, or adding an income tax every year.

We are all hearing from many points of view that this isn't the right time to take up the Permanent Fund reform bill. Objections range across the political spectrum, from "don't touch my dividend," to "cut more spending first," to "don't cut the dividend without cutting more oil taxes" or "we can always start next year." Spending, taxes and dividends are all vitally important matters in Alaska's public policy, but they are secondary at this moment in the battle to keep the state and our economy on an even keel.

Just as low oil prices cut Alaska's ability to earn revenue, the more money the state keeps invested and growing in value, the better off we all are. Reinforcing the Permanent Fund's highest possible value this year will allow it to continue to compound its growth into the future at a higher level than after a large dividend payout this fall. Having a stable flow of revenue available to the general fund, and, over the next few years, capping the dividend at $1,000, will allow the state time to find efficient administrative savings; find the right balance of tax incentives — but most importantly have the power of compound interest work to benefit all Alaskans. Isn't that what the Alaska Constitution requires?

It is a question of losing major options. We can spend years making choices on resource development, figuring out what broad-based taxes are best, and what we think are essential state services. Education, health care, retirement benefits and maintenance of infrastructure are vital to life here and we need to agree on their optimal mix. But if we delay the restructuring for even a year, we lose the funding for a few of those options in the future. Delay five years and lose even more resources — and most of our dividends.

This administration proposed a fiscal plan that had some of all the major elements needed for restructuring — a stable draw of revenue for government, a reasonable and sustainable long-term dividend, and putting the oil-price volatility where it can be properly managed. These three features, as well as a source of additional new revenues and reasonable cuts, must be enacted in some, considered form. Many of us wish the legislators had voted all those pieces into place this session. They haven't.

But postponing changes in the fiscal restructure and the Permanent Fund earnings will just make the size of the structural, long-term problem significantly larger and unmanageable.

What is the cost of inaction? It's that calculation above, significantly more than $2 billion, thanks to the power of compound interest. Then add in the higher state borrowing costs resulting from the credit downgrade Alaska will face, from having failed to demonstrate this year that we are creditworthy – on Tuesday Fitch Ratings became the third agency to downgrade Alaska's credit. When we have no choice but to borrow, the interest rates will be considerably more than if we had our house in order. Each extra 1 percent on a $1 billion loan, over 30 years, costs about $150 million.

Add these two kinds of costs together and it's a staggering penalty of giving up close to $3 billion — forever — for no good reason, just for waiting until next year to take up the Permanent Fund restructuring. That's like the smoker who doesn't quit until lung cancer quits for him.

Additional savings to be found in state government and new taxes can be reviewed, tinkered with and re-evaluated every year. That is what our legislative finance committees can do when producing an annual budget. What cannot ever be replaced is the simple cost of waiting to restructure our Permanent Fund. Legislators, there is no justification for wasting so much of our state's precious savings.

Alice Rogoff is publisher of Alaska Dispatch News.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary@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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