Alaska’s fiscal crisis — and a proposed solution

The state of Alaska has a problem taller than Denali. We cannot pay for our education, roads, public safety and residents’ Permanent Fund dividends. This problem has gotten much worse in recent years, and every year that passes makes it even bigger and more difficult. A comprehensive solution would strengthen the protection for the Permanent Fund, produce a sustainable dividend formula, and restore broad-based taxes and an oil tax increase.

For about 35 years — from roughly 1980 to the mid-2010s — the state of Alaska paid for its expenditures almost entirely by getting large amounts of new oil money each year. Since the mid-2010s, the money from oil taxes and oil royalties has dropped dramatically due to Alaska’s falling oil production, lower world oil prices, and the 2013 change to our oil tax system that made the state’s revenues more vulnerable to those lower oil prices. The state’s oil revenues are now lower than they were back in the late 1970s, after adjusting for population and inflation.

The state of Alaska has responded to the collapse in oil revenues by cutting its spending substantially — 43% in the past eight years — and spending its savings, which are now almost exhausted outside the Permanent Fund. The state now depends heavily on spending Permanent Fund earnings — which provide more than 65% of the state government’s spending — under a law adopted in 2018 that allows the annual use of Permanent Fund earnings while preserving the Permanent Fund for future generations. But the sustainable spending from Permanent Fund earnings under this Percent of Market Value, or POMV, system does not provide sufficient revenues to pay for what Alaskans receive from their state government, even when combined with the much smaller flow of oil and other revenue sources.

Add it up, and the picture is grim. The state of Alaska runs a savings-financed deficit of more than $1 billion each year. With no change, the Permanent Fund Earnings Reserve Account and the Constitutional Budget Reserve Fund both go to zero in fiscal 2029, which starts only seven years from now. (The Alaska Legislative Finance Division produced these projections, which rely on Unrestricted General Fund dollars — the most common definition of the budget.)

Three commonly discussed approaches to this long-term structural deficit would seriously damage our state:

1. Trying to close the deficit with additional budget cuts alone would further harm essential services and cost the most jobs. The governor’s fiscal projections show that he understands this. It is likely that no more large budget cuts are possible without violating constitutional obligations to fund services such as education.

2. Overspending the Permanent Fund earnings to pay for large dividends or other spending is extremely short-sighted and robs Alaskans of a stable, sustainable source of revenues to provide the services Alaskans need.

3. Cutting the dividend to zero weakens incentives to preserve the Permanent Fund. Eliminating the dividend also disproportionately hurts lower-income Alaskans while letting highly paid nonresident workers in Alaska off scot-free.

A proposed comprehensive solution

1. Alaskans should adopt a constitutional amendment that puts the POMV system in the Alaska Constitution to prevent continual overspending of the Permanent Fund and a disruption of a critical revenue source. This constitutionalizing of the POMV both prevents future overdraws and forces us to find a sustainable solution.

2. Alaskans should amend the Alaska Constitution to guarantee a Permanent Fund Dividend at a sustainable level to keep dividends flowing. An additional benefit to placing the dividend formula in the constitution is that it would restore functionality to Alaska politics, as the Legislature’s setting of the dividend annually has proven to make our lawmakers unable to address Alaska’s other issues.

3. Alaska needs to bring back broad-based taxes such as an income tax focused on higher incomes and/or a statewide sales tax — like every other state has. An income tax, like the one Alaska used to have, is the fairest broad-based tax and would capture income made by non-residents in Alaska. A broad-based tax could raise perhaps $700 million annually.

4. An increase in taxes on the oil industry in the range of $200 million-$400 million per year should be considered as part of a package to address our state’s fiscal crisis.

5. A systematic review of the state government’s operations and expenditures should be conducted to identify potential reductions and savings, while recognizing that the budget might need to increase on net to cover critical unmet needs in the capital budget and other areas. Any additional spending limit must match this reality and not turn into a straitjacket that hurts Alaskans.

6. In a comprehensive package deal to resolve Alaska’s structural fiscal deficit — such as a grand bargain containing the five recommendations presented above — a one-time jumbo dividend partly financed by a one-time overdraw of the Permanent Fund might be useful as a sweetener to help secure passage of a realistic and defined plan for transitioning to a sustainable system. Such an overdraw is only tolerable if it produces a long-term sustainable system.

Cliff Groh’s work on Alaska’s fiscal issues over the past four decades includes serving as the legislative assistant who worked by far the most on the passage of the legislation in 1982 creating the Permanent Fund dividend. More of his fiscal analysis is available at www.cliffgroh.org

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