Dividend cut salts the wound of recession

Gov. Bill Walker may have stumbled upon the worst possible way to begin closing the state's multibillion-dollar budget gap when he slashed the Permanent Fund dividend by more than half as part of a $1.29 billion smoke-and-mirrors budget veto he called a "day of reckoning."

Beset by low oil prices and sagging production, weakened by reduced industry spending and an iffy job market, Alaska's economy has slipped into a recession — something Walker seems not to notice — and more than halving the dividend to $1,022 is likely to make things worse.

[Gov. Walker's veto cuts Alaska Permanent Fund dividends to $1,022]

Walker's June 29 veto, after the Legislature balked at his fiscal plan to address the state's multibillion-dollar budget deficit, lopped $695.6 million from nearly $1.4 billion earmarked for dividends. Additionally, it slashed $400 million in oil tax credits that eventually must be paid and — it barely is worth noting — nibbled away a paltry $38 million in department spending.

The veto is being challenged in court by Anchorage state Sen. Bill Wielechowski and two former lawmakers. They argue Walker lacks authority to veto the dividend money. A Superior Court judge decided the case in Walker's favor, but it is being appealed to the Alaska Supreme Court.

While lawyers wrangle over that in a courtroom, consider this: The $695.6 million the governor vetoed will not be rippling through the faltering economy as consumer spending or savings that create jobs, wealth and more spending. That will affect every business and industry in the state.

Instead, that money will feed a government already far too big and seemingly impervious to serious cutting because rich, powerful Alaska businesses and unions do not want it cut.

Many Alaskans, among them Brad Keithley, a former business executive, lawyer and consultant with 35 years experience in oil, gas and fiscal issues, feel the state is careening off in the wrong direction as it grapples with its budget mess. They believe there should be more cuts, significant cuts, in areas such as Alaska's Cadillac Medicaid program and the University of Alaska; that we should be seeking a sustainable spending level to see us through the troughs and peaks in volatile oil prices.

[Gov. Walker looks again to Permanent Fund for revenue to balance budget]

Walker recently released his 10-year fiscal plan, a forecast of what he plans to do, and Keithley says it is telling.

"There is no mention, none, zero, of the fact that Alaska is in a recession," Keithley says. "The most important thing that this state faces right now is we are in an economic recession. We've got people hurting. We've got an economy that's down.

"Government has a lot to do with how you deal with that. They can make it worse. They can make it better. But there is no mention of it in the governor's 10-year fiscal plan. It's like it doesn't exist."

Rather than spending cuts, much of Walker's plan focuses on efforts to increase revenues by doing things such as reducing the dividend, Keithley says, but doing that siphons money out of the overall economy, making the recession worse.

"ISER (the University of Alaska Anchorage's Institute of Social and Economic Research) concluded it (a PFD cut) has the largest adverse impact of any of the fiscal tools on the overall Alaska economy," he said. "And yet, at the very time that we are in a recession that ought to be driving our economic policy, the governor is proposing to make it worse by permanently cutting the PFD."

ISER's Gunnar Knapp, Matthew Berman and Mouhcine Guettabi, in "Short-run economic impacts of Alaska fiscal options," earlier this year compared the potential short-run economic effects of sustainable options ranging from cutting the state's workforce, to taxes, to cutting the PFD as the state tries to raise revenues.

The study concluded dividend cuts have "the greatest short-run effects on income," and cost the poorest Alaskans the most in disposable income.

"For $100 million in revenue raised, the poorest Alaskans would lose about $150 each, or more than 3 percent of their disposable income," they concluded. "By comparison, the wealthiest Alaskans would lose about 0.1 percent per person."

There is but one option, the paper's authors say, with no short-run economic effects.

"Anything the state does to reduce the deficit will cost the economy jobs and money," they wrote. "But spending some of the Permanent Fund earnings the state currently saves would not have short-run economic effects. Saving less would, however, slow Permanent Fund growth and reduce future earnings."

Perhaps instead of panicking — and Keithley and others say there is no need — the thing to do would be to listen to those who want to trim more from government, use Permanent Fund earnings to provide revenue, find a sustainable spending level and pursue approaches least damaging to the private economy before turning to the dividends.

A balanced budget should not require a crippled private economy.

Paul Jenkins is editor of the AnchorageDailyPlanet.com, a division of Porcaro Communications.