As Legislators report to Juneau for the start of the 2016 session this week, it’s not hard to guess what will be the dominant issue in the capitol building this year. Like last year, the state budget crisis will leave precious little room in the short 90-day session for consideration of other items. Like last year, the state will start in a roughly $4 billion budget hole, as a further slump in oil prices — and thus state revenues — has wiped out the $800 million in cuts Gov. Bill Walker and the Legislature made last year. Unlike last year, the state can’t afford to focus solely on cuts again. With depletion of all state savings less than two years away even if even deeper cuts are made, there can be no solution that does not first and foremost involve leveraging the state’s biggest asset — the Alaska Permanent Fund. If legislators finish their session this year without taking that essential step, the economic consequences for the state will be dire.
Some in the Legislature have intimated or outright stated the solution to the state’s budget deficit can be accomplished by cuts alone. This is folly, and every legislator knows better. To reduce state spending to a level where the budget would balance at current oil prices without other modifications to the revenue structure, it would mean cutting all state funding for health and education (actions that would devastate the state even if they were possible), as well as slashing every state department by 70 percent. State services, including public safety and transportation, would be so minimal as to be almost useless. Alaska would resemble a third-world country.
The solution, then, must involve new revenue for the state, and a lot of it. Given that the state has less than two years of savings remaining, there isn’t time to build a natural gas pipeline. There isn’t time to diversify the economy and bring substantial new revenue from industry to state coffers. There’s only time to get the Alaska Permanent Fund working to help generate revenue that will keep the state running.
While residents are skeptical of changes to the fund, without changes, there will be no more dividend checks in three years because the state will be drawing billions of dollars from the account that pays them.
The state is fortunate to be in a position where — if action is taken this year, as it must be — the fund can be used as a revenue-generating vehicle without depleting either its corpus (which is protected by the Alaska Constitution) or earnings reserve (which has historically been used to pay out the dividends Alaskans have come to cherish). It’s also fortunate to have two plans put forward so far, Sen. Lesil McGuire’s SB 114 and Gov. Walker’s endowment plan, that can be used as a framework for expedient passage of the state’s number one priority. Both use the same basic mechanism: use the revenue generated from the permanent fund’s investments to help pay for state services, protecting the principal and allowing for some level of dividend to residents.
Admittedly, making the necessary changes to the permanent fund structure won’t cover the entire $4 billion revenue gap. But no other revenue solution, whether it be income or sales taxes, eliminating oil tax credits, higher licensing fees or other items, will come anywhere close to helping balance the budget, and many of those revenue proposals are likely to become sticking points that stall progress in the Legislature. The utilization of the permanent fund is the only way to keep the state from fiscal catastrophe; it must be accomplished first, and without other contentious items bogging it down. At 90 days, the legislative session is already too short; to pile on divisive issues would defeat all budget progress.
It won’t be an easy session for the Legislature. Constituents affected by cuts already in place and fearful of more are likely to speak loudly, with diverse priorities that are difficult to satisfy. But one thing can’t be stated loudly enough: All other business aside, the Legislature and Gov. Walker must pass a framework incorporating the permanent fund as part of the state budget solution. If they do not, this session cannot be deemed anything but a failure, and Alaska’s people will pay dearly for the delay.
— Fairbanks Daily News-Miner,