Alaska faces a dilemma. Should we continue to choose to balance our budget deficit by spending from our primary savings account – the Constitutional Budget Reserve (CBR)? This year only 30% of our budget was paid for by current revenues. For the last 3 years the legislature has worked to reduce the budget with strategic cuts, balancing the remaining budget by simply taking whatever was necessary from the CBR. Last year, even after the Governor’s large vetoes, we used $3.2 billion of the CBR, leaving only $3 billion, not enough for even one more year of a similar budget. There are a few smaller designated general funds like the Alaska Performance Scholarship, Power Cost Equalization, and Alaska Housing. However, these have been seen as essential elements to a fair and vibrant economy in Alaska. There is also the Permanent Fund Earnings Reserve Account (ERA) but because it is based on the fluctuating performance of investments, it is very volatile (a 10% earnings correction on the $50 billion Permanent Fund value would be a loss of $5 billion). If the ERA is too small then no PFD can be paid.
Or should we diversify our revenue sources to slow the depletion of our savings? This is often called a sustainable fiscal plan and is generally agreed to contain four elements: A reduction in budget expenditures; Diversion of a portion of the PFD to help fund the budget; A transfer of a formula specific portion of the ERA to the budget; and A broad based sales or income tax for new revenue. The other 49 states have figured out how to create revenue through a combination of state income, sales and property taxes. Alaska currently has none of these relatively stable sources of revenue to support state government. The PFD reduction is not available to any other state but can’t be too large without negatively affecting individual Alaskan families and the economy of Alaska. Almost no other states have a wealth fund, but drawing down too much, diminishing its value is prohibited by our constitution. Cutting too much would eliminate the services Alaskans say they want such as good education, public safety, roads, airports, and an adequate resource permitting and management system.
A Sustainable Fiscal Plan must be based on the current revenues — anticipated to be about $1.2 billion per year at the current range of oil prices. Then we can narrow the gap with a $6-700 million broad based tax, a $6-700 million diversion of PFD payouts and a $1.2 billion formula for ERA draw. This gives us about $3.8 of the $4.5 billion unrestricted general fund budget, leaving about $700 million to close with cuts or a combination of cuts and smaller targeted tax increases. Perhaps half of that can come from oil tax credit and tax payment reform, leaving a small enough deficit to deal with effectively over time. All of these are tough decisions but omitting any one class leaves a deficit so large as to make sustainability almost unachievable. There is no Alaskan who escapes pain and some of it is distributed to nonresident workers as well. If the tax and payment reductions are properly scheduled all families will see a proportional impact regardless of economic status.
We’ve had a long free-ride, with the public’s oil resources paying for all our services and infrastructure. Voters can send candidates to Juneau with either of two messages; continue the free-ride using our children’s savings, or pass a sustainable fiscal plan to provide for a stable economy, not only for ourselves but for our children and grandchildren.
