Alaska aims to reshape state’s relationship with oil
After months of public debate, lawmakers will gavel in on Tuesday in Juneau to begin fashioning a solution to the state’s budget crisis.
With oil dipping ominously below $30 a barrel, Alaska faces a deficit of at least $3.5 billion — or two-thirds the general fund budget.
Gov. Bill Walker says the state must change how it does business: he argues it’s time for Alaska to tap its enormous savings accounts.
The governor’s plan would fundamentally reshape the state’s relationship with oil.
And Walker says Alaska always knew this day was coming.
“Everybody knew we would get here at some point,” he said — “here” being the point at which crude no longer covers our costs.
‘Burning our roof rafters to stay warm:’ governor
For decades, Alaska’s budget has followed the rise and fall of oil: big budgets in boom years, big cuts during the inevitable bust.
But with oil production declining, Walker argues, Alaska faces a new reality. Even if the price of oil recovers, it’s not clear that revenue will. Meanwhile, with oil down, earnings on the state’s savings are now Alaska’s single largest source of income.
Last year, lawmakers pieced together a budget by cutting infrastructure projects and dipping into savings. Walker said that’s not sustainable.
“We’re sort of burning our roof rafters to stay warm,” he said. “You can only do that for so long and pretty soon you run out of roof rafters.”
Exploring funding optionsThe governor has put forward a proposal he hopes will get Alaska off the oil and gas roller coaster.
Attorney General Craig Richards was tasked with building the plan. Richards compared the current system to a dysfunctional household.
“It’s like if you have a husband and a wife, and one of them was a gambler for a living, and one of them had a steady job,” he said. “What we’ve been doing, as the state of Alaska, is we have been living day to day on the gambler’s salary, and we have been saving the steady salary.”
In other words, the state has been funding basic operations — everything from education to snow plows — off unpredictable oil taxes. Meanwhile, the relatively steady earnings from the state’s $50 billion Permanent Fund have remained off-limits. About half the fund’s earnings are saved, while the other half is paid out in dividends.
Role of Permanent Fund
Walker and Richards want to turn the current model on its head. They’d use Permanent Fund earnings to pay for government, while setting aside some oil revenue to pay for dividends.
Richards callled it a “game changer.”
“It takes oil price volatility out of our state budget and our economy, and it puts it into our savings account,” he said.
The plan would dump most of the state’s oil and gas revenue into the Permanent Fund. (It would also pull about $3 billion from the Constitutional Budget Reserve, the state’s rainy day fund.) Oil prices could go up, they could go down, but the Fund would serve as a cushion — and act as an endowment, generating a steady stream of income for the state.
Call it Alaska’s retirement account. We’ve been setting aside a portion of our paycheck for 40 years. Now, that paycheck isn’t coming anymore. It’s time to switch gears, Richards said, and start living off the savings.
“To me the question has never been, ‘are we one day going to spend the Permanent Fund to support state government,’” he said. “It’s: Is today the right time?”
The Administration’s answer is an emphatic “yes.”
The catch? If Permanent Fund earnings are used for state government, they can’t be used for the PFD.
Instead, the plan would devote half the state’s oil royalties to a separate fund to pay dividends. That would cut the PFD in half next year, to about $1,000.
That’s not far off the historical average. But if oil production continues to decline, then the dividend would drop with it.
Richards and Walker argue that if the state continues to burn through its savings, there won’t be anything left for dividends, anyway.
“If if we do nothing, the dividend disappears in five years,” Richards said.
Is income tax coming back?
At the end of the day, Richards said he sees no way to solve the budget crisis without tapping the Permanent Fund — whether it’s the governor’s plan or something else.
Say, for instance, lawmakers cut a billion dollars from the budget — a huge lift. Add in an aggressive income tax, which might raise half a billion dollars. A major sales tax could bring in another half a billion.
“Any one of those things would be a major accomplishment,” Richards said. “So the idea that you could do all of them is pretty out there. And it only gets you slightly more than halfway to the solution.”
The governor’s plan isn’t a full solution, either. The administration estimates that “replumbing” the Permanent Fund could generate about $3.3 billion a year, while still maintaining and inflation-proofing the Fund’s principal.
That still leaves a billion dollar hole. To close the gap, the administration is proposing a slew of new taxes — including the first income tax since 1980.
The governor’s plan would also raise about half a billion dollars from the oil industry. And it would cut about $100 million from state agencies.
It all adds up to a tall order anytime, let alone in an election year.
But Walker said the state has no choice: “To do nothing is absolutely not an option.”
We’ll hear reactions from lawmakers — and how they think Alaska should tackle its budget crisis — throughout the week. We’ll post those reactions here as they air:
Gov. Bill Walker: “Some believe that the price of oil will bounce up again…and that will save the day. I’m not one of those.”
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