Governor Walker’s announcement earlier this week that our state budget crisis has deepened by a further $300 million should galvanize the attention of all Alaskans. Things are getting worse, not better.
We must quickly confront two long overdue questions. How much state government are we willing to pay for, now that we DO have to pay for it? And exactly how do we wish to pay?
As it stands today, March of 2016, we still have some acceptable options to close a gap that amounts to well over $13,000 per household. However, if our state policymakers fail to take some crucial steps, this year, the options get a lot worse. We could end up burning through our available reserves so fast that we put the Permanent Fund Dividend Program in jeopardy along with our state’s overall financial health.
It is important to remember that the Permanent Fund dividend is not protected by our state constitution. Only the Permanent Fund itself is constitutionally protected. The annual earnings of the fund – interest, dividends and capital gains – are deposited into the Earnings Reserve Account and are fair game for any purpose, including but not limited to dividends.
The Fund was created by voters in 1976 as a way to save nonrenewable oil revenue for a “rainy day”. The Alaska Legislature created the dividend program several years later, by statute, but not by constitutional amendment. It can be repealed or altered by a simple majority vote of the Legislature.
Even so, most Alaskans will expect policymakers to somehow preserve the popular dividend. And it IS possible. But it will take some tough choices. To see how tough, go to Plan4Alaska.com, a web tool developed by Alaska’s Rasmuson Foundation, and play around with a few assumptions. It is a very user-friendly tool that strips away the rhetoric and forces some grown-up choices. Or, if you prefer spreadsheets, download the more detailed budget deficit models at AKFuture.org.
In the fiscal plan I created with these tools, using a conservative $40/bbl for oil prices, I was able to balance the budget by cutting state general fund spending nearly 20 percent from 2016 levels, reducing dividends to $1,250, using $1.3 billion in Permanent Fund earnings for general government, imposing a statewide sales tax of 4 percent, a few smaller taxes and fees, and then a relatively modest amount of reserve savings ($500 million).
Whatever your preferred mix of solutions, any reasonably balanced solution will require these core elements, I believe:
— Deep budget cuts. Governor Walker’s proposed 2.5 percent reduction in the operating budget for state agencies next year was way too timid – tone deaf and irresponsible. The agency operating budgets passed recently by the House and Senate, at -6.9 percent and -8.4 percent, respectively, are better, but stronger leadership is needed. For example, the Senate’s move to squirrel an extra $342 million in scarce cash into state retirement funds beyond that required to meet next year’s obligations is rather mystifying. Overall, Alaska has the largest state government in the U.S., per capita, by a wide margin. We can no longer afford that.
— Broad based taxes. We don’t necessarily need both an income and a sales tax, but at least one of the two is needed. I prefer the sales tax, personally, but it would have to have very few exemptions.
— Use of some Permanent Fund earnings for general government.
— Reduced Permanent Fund Dividend. To preserve it we must be less greedy. Dropping from a dividend of over $2,000 to something in the $1,000 to $1,250 range seems reasonable, for now. And that is not far from its average of the past six years.
All of the above is easy enough to say, but will require impressive political courage.
Policymakers will have to face up to the reality that state government is no longer “free” to Alaskans – that some combination of broad taxes, endowment based financial management (such as SB 114) and leaner dividends are inescapable for the latter to be sustained.
That last part is important. The dividend program has become essential to the cash economy of rural Alaska, the college savings accounts of young Alaskans, and is an important part of what makes Alaska unique. Tell your legislator to make the tough choices now, while there is still time.
Scott Hawkins is President and CEO of Advanced Supply Chain International, Chairman of ProsperityAlaska.org, and past President of the Anchorage Economic Development Corp. The opinions expressed are his own.
