By now, most of you know we have a budget challenge: Over the past two years, Alaska’s oil revenue has plummeted by 88 percent, mainly due to a sharp drop in oil prices.

We’ve cut the budget from $8 billion in 2012 to $4.8 billion. Despite these reductions, our deficit amounts to more than half our annual budget.

If we do nothing, we’re on a course to drain the constitutional budget reserve within two years – and the permanent fund earnings reserve within another two years. Dividends would likely end within four years, and we’ll be left with no source of funding for public services like troopers, teachers, and transportation.

Here’s the good news: We don’t have a wealth problem, we have a cash-flow problem. And we have a plan.

When oil started flowing through the trans-Alaska pipeline, the late Governor Jay Hammond and others recognized that oil wouldn’t sustain us forever. They created the Alaska Permanent Fund as a means to turn a temporary oil boon into a permanent income generator.

Governor Hammond said, “I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity.”

And he succeeded. We’ve reached a crossover point where our savings earn more income than our oil.

It’s time to put our wealth to work.

One of the problems that has plagued Alaska is our dependence on a volatile revenue source. We feast when oil revenue goes up, and it’s famine time when oil goes down. We need to get off the boom-and-bust cycle – we need to put government on an allowance, provide stability for our economy, and give investors confidence in our future.

That’s what my proposal aims to do. A key piece of my plan is the Alaska Permanent Fund Protection Act. Instead of putting oil revenue into the general fund, the legislation puts most oil revenue in the Alaska Permanent Fund, which is big enough to absorb the revenue volatility. A set portion of the earnings would be used each year to support government services. That amount would go up (or down) with inflation – rather than with the price of oil.

But first, half of all royalty revenue would be set aside for distribution to Alaskans as dividends. The first year, my bill provides a fixed dividend of $1000. Future dividends are expected to be around $1000 based on current projections. If and when new resource development comes on line, dividends will increase.

The Alaska Permanent Fund Protection Act reduces the need for taxes. It does not touch the principal of the fund. Rather, my bill diverts more income to the fund, and sets up stable and sustainable use of earnings. This plan makes the Permanent Fund permanent.

This gets us most of the way toward closing the budget gap. I am proposing other measures to get us the rest of the way there: oil tax credit reform, modest broad-based taxes, and other targeted tax increases. All who benefit from our great state – including nonresident workers – are part of the solution.

The other key part of our plan is continuing to bring down state spending. On top of $900 million in cuts last year, we’re proposing more than $100 million in reductions in the coming year. We’ve instituted statewide travel and hiring restrictions. We’re establishing shared services agreements to reduce government overhead. We’re consolidating divisions. We’re doing away with some programs. This is just the beginning of a long-term effort to reduce the size of government without harming Alaskans or our economy.

The question we’ve asked over and over as we’ve crafted this plan is, “Is it fair? Is it balanced?” We can and no doubt will debate what’s fair and what’s balanced. I welcome that debate. This plan is written in pencil, not pen.

The only truly unacceptable course is to do nothing. Our credit rating was recently downgraded, and credit agencies have warned that we must take action this year to close the gap between our spending and revenues to avoid further downgrades. Lower credit ratings mean higher costs of borrowing for critical projects, and can have a chilling effect on investment.

Ultimately, a balanced budget is just a means to an end. Alaskans have dreams and goals. Most of us want to live in a community that feels safe and healthy, where our children can get a good education, where there are jobs and opportunities – where our families can thrive. It’s hard to do that when the budget is so off-kilter and uncertainty looms large.

Let’s roll up our sleeves and pull together to solve our budget challenge so we can move on to the goals and visions we carry for ourselves, for our families, and for our state.

Bill Walker is governor of Alaska.