The political risk of doing nothing about the state deficit has become greater, or at least as great, as the risk of reducing the Alaska Permanent Fund dividend, and that shift has moved legislators to promise action this year beyond budget cuts.
Senate Finance Committee Co-Chairman Pete Kelly, R-Fairbanks, who in December dismissed Gov. Bill Walker's plan to solve the crisis, commented in support of Walker's direction Thursday. In a committee meeting earlier in the day, he spoke as if using the Permanent Fund earnings reserve was a certainty.
House Speaker Mike Chenault, R-Kenai, told the Alaska Public Radio Network Wednesday that chances of the Legislature cutting the dividend this year are, "50-50," an unthinkable statement just months ago.
Asked to explain the change in mood, Senate President Kevin Meyer, R-Anchorage, said, "The Rasmuson Poll."
The Rasmuson Foundation released a survey Wednesday that showed that 83 percent of voters would be less likely to support a legislator who doesn't take action this year.
"If we don't (address the problem), the Alaskans are willing to put somebody in there who will," Meyer said. "Obviously a poll is only a snapshot at any given time, but we've been hearing that from our constituents as well."
Sen. Anna MacKinnon, R-Eagle River, said many of her constituents haven't wrapped their heads around what $30-a-barrel oil means. They still talk about cuts that wouldn't begin to touch a deficit of nearly $4 billion, such as a suggestion to hold off on buying new vehicles for the state. MacKinnon and others said cutting is important, but she said using the state's assets as an endowment for government is the only real solution.
Even with oil revenue vanishing and the general fund budget more than 70 percent in the red, Alaska's problem has never been a lack of money. We don't pay state taxes and the state's savings are equivalent to everyone's income, combined, for two and a half years. We can afford to have a state government.
Alaska's problem has been the Legislature. Hard-liners on both sides refused to act. The Legislature as a whole functioned poorly. Last year it stayed in session into the summer, flirting with a government shutdown while fighting over spending that amounted to less than 1 percent of the deficit.
With the consequences of inaction catastrophic, our economy and schools lay like damsels in distress tied to the railroad tracks. Now legislators say they will untie the cords.
What will the solution look like?
The easy pieces will come first. MacKinnon, co-chair of the Senate Finance Committee, pointed to the inflation-proofing paid into the Permanent Fund annually as a source of $900 million that could instead go into the budget.
Former Sen. Arliss Sturgulewski championed the inflation-proofing statute in 1982 when the fund was invested exclusively in federal securities that paid regular interest. Spending the interest would mean the principal investment would shrink with inflation. Her law simply put some earnings back into the fund based on cost-of-living increases.
Over time, those deposits have done more to increase the size of the fund than any other source. But today, the fund invests in stocks, real estate, venture capital and other kinds of inflation-beating investments that it holds for long periods. Meyer said Angela Rodell, director of the Alaska Permanent Fund Corp., told senators inflation-proofing is no longer necessary.
Even if it were necessary, inflation is the least of our worries at the moment.
The right way to address the payout mechanism would be to rewrite it in the Alaska Constitution, but MacKinnon said that idea, called Percent of Market Value, is unpopular in polling. In the meantime, the Legislature can simply repeal Sturgulewski's legislation for an easy source of money.
Cutting oil tax credits is the next easiest flow of funds to go after. The credits are inefficient and poorly designed. With oil prices around $30 a barrel they have become absurd, with endless payback periods for the state. When Meyer talks about $700 million to $800 million in spending cuts, he is including the credits.
But those strategies and other cuts would still cover less than half of the problem. The rest requires balancing fairness and other values, which is hard, unpredictable work.
Cutting the dividend by half would provide about $700 million for spending, as Walker's plan essentially does (in his scheme, it would continue to go down in future years).
For Alaskans with below-average income, who could dominate elections if they turned out, the dividend is a substantial part of family spending.
"My district is a working class district with a lot of lower-income people as well. I don't think the governor's plan is fair to them," said Sen. Bill Wielechowski, D-Anchorage. "But, at the same time, I don't want to see the state go off a cliff."
Rural legislators also oppose a dividend cut because the money is especially important in their areas. But so are services.
Imposing a graduated income tax would make a dividend reduction fairer, but has little chance with the Republican majorities. Meyer said even relatively popular taxes, like a tobacco tax increase, which he favors, would bring out a flood of lobbyists and bog down the Legislature.
Faced by shared peril, legislators are unusually open to ideas this year, but few want to speak up first. They are still circling, waiting like the mice in the fable of Belling the Cat — the story of mice who agreed that putting a bell on a dangerous cat would be a great idea, but who all thought someone else should do it.
One reasonable prediction would be that this session will end inflation-proofing, repeal oil tax credits, do some budget cuts, and reduce the dividend to something close to the 10-year average, around $1,300. The gap wouldn't be closed, but the hemorrhaging would be slowed.
I'd prefer that outcome to nothing. But to create a fair and sustainable fiscal system, an income tax and other taxes would have to follow later.
Correction: This story originally identified Sen. Anna MacKinnon as Sen. Anna McKinnon.
Charles Wohlforth's column appears three times weekly. Among other books he wrote, he assisted Dave Rose with a history of the Alaska Permanent Fund, "Saving for the Future."
The views expressed here are the writer's and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com or click here to submit via any web browser.