Dear Fellow Alaskans,
This is my analysis of the fiscal mess we are in. What I am about to share with you is my prediction of what will come about next session. I feel like Cassandra, “being able to predict the future, but no one is listening.”
Here is what is going to happen. By the way, these numbers have been reviewed and corroborated by the Governor’s budget office and Revenue Department and the Legislative Finance Division.
Total Fiscal Year 2019 general fund budget: $5.5 billion – this includes the operating budget to match this year’s level of services, state debt, a modest capital budget as well as the Permanent Fund dividend at this year’s amount.
The total general fund revenue that we can responsibly forecast is about $1.8 billion. If you subtract this from the total budget, you come to approximately a $3.7 billion deficit. Since we have essentially used up almost all of our reserves, we have to fund this deficit through a draw on the Permanent Fund. Technically, the legislature is allowed to draw down the earnings reserve. In my opinion, that is part of the Permanent Fund.
The Permanent Fund is about $60 billion, as of Aug. 11. A 5 percent draw is around $3 billion and a 6 percent is $3.5 billion. A 6.5 percent draw would take care of the deficit. We are going to be backed into this situation because we have no other alternative due to inaction by past legislatures.
Enacting various taxes, i.e. motor fuel, fish, mining, alcohol, will take a year to collect. Enacting a modest income tax will take at least a year to realize its potential. Reducing the budget to ‘right size the government’ is a real option but who is going to do this? Even if the budget was reduced by $200 million to $400 million over a two-year period, we still would need to seriously tap the Permanent Fund. As you may know, well-run college foundations are taking only 4 percent to 4.5 percent each year, the amount experts say is a draw that’s sustainable and allows for inflation proofing. As my father used to say, “Inflation is a thief in the night.”
Even if you can reduce the budget by, say, $400 million, you still have a deficit of around $3.3 million to fund.
What I am alluding to is that we have to come up with revenues and reductions in the operating budget. As some Alaskans say, “We have to right size the government before we institute more taxes – especially an income tax”. If the Senate or House cannot agree on reductions, I suggest that the legislature and Governor come up with a ‘Blue Ribbon Committee’ to make the necessary reductions – Alaska’s own BRAC Commission, the Base Realignment and Closure Commission that Congress established to help make those tough decisions.
By allowing ourselves to get into this situation, we are imperiling the corpus of the Permanent Fund.
So, I predict that we will take a 6 percent plus draw from the Permanent Fund next year with little reduction in the budget, along with much discussion on additional revenue sources and a further ‘kick the can’ approach, especially during an election year.
We know what has to be done. Many at the legislature know this and the Governor knows this. But, unless we can agree to agree, we will see a steady decline in the Permanent Fund with no solution in sight.
I hope I am wrong in my prediction.
Ed Rasmuson is a retired banker and lifelong Alaskan.
