EDITORIAL: Red lights flashing for Alaska’s fiscal situation

Alaska has passed a number of troubling milestones in the past decade as lawmakers have continually punted on fixing Alaska’s structural fiscal problems. But none was more sobering than the one that came July 1, when Gov. Mike Dunleavy authorized a $1 billion transfer from the Permanent Fund Earnings Reserve to its constitutionally protected principal — and less than 60% of that money was actually in the account to be transferred. As the Earnings Reserve becomes a funding source of greater and greater importance, we should recognize how precarious its status has become.

In past decades, oil tax revenues buoyed Alaska’s budgets, and despite a handful of brutal dives on the oil-revenue rollercoaster, those funds carried the state along smoothly enough that many Alaskans were lulled into believing that the free ride could go on forever. And the problem with believing that a free ride will go on forever is that you tend not to plan for what happens when it inevitably ends. That end came in late 2014, when an oil price slump meant that declining production in the state could no longer be ignored. Since then, oil tax revenue has taken a back seat to investment income as a source of state funds — although we may consider ourselves a resource state above all else, the fact of the matter is that prudent money management has become more important to the funding of state services and Permanent Fund dividends than the throughput of the trans-Alaska oil pipeline. If we lose the Permanent Fund’s ability to generate enough revenue to inflation-proof itself, fund state services and PFDs alike, we will not only lose our annual checks but also be in dire straits with respect to funding essential state functions such as public safety, transportation and education.

But despite how obvious it should be that the Permanent Fund and its Earnings Reserve should be held sacrosanct (and, when possible, augmented to expand their ability to make up for shortfalls elsewhere), lawmakers have been cavalier about withdrawing more from the reserve account than it earns in the name of distributing supersized PFDs — to the point that we’re now left crossing our fingers and hoping the fund earns enough to fulfill its promised deposit.

The fix for the state’s developing fiscal crisis is no mystery — the staff of the Alaska Permanent Fund Corp. presented legislators with a detailed analysis and solution earlier this year, and their proposal is the right one.

The two parts of the Permanent Fund (constitutionally protected principal and unprotected earnings reserve) should be combined into one. In addition, Alaska needs a hard constitutional limit on how much the Legislature can spend — including on Permanent Fund dividends — each year.

The Permanent Fund’s bifurcated status is a headache for money managers and a liability for the state. Money can be freely withdrawn from the earnings reserve via a majority vote of the Legislature, which has led us to its current near-empty state. If it were constitutionally combined with the principal and a cap established on the amount that can be withdrawn each year, Alaska would escape the oil-price rollercoaster, protect the fund’s principal and greatly smooth the amount available for state services each year — providing legislators and the governor can resist the siren song of overspending on dividend checks.

In addition to protecting the fund’s earnings from unsustainable raids, a hard spending cap would reduce the number of fiscal items that could be used as leverage during the fraught budget negotiations at the end of the legislative session. That limit should be a cap on total spending, including the annual appropriation for the PFD, in order to end the “Christmas tree” spending of oil boom years. Establishing that mandatory level of fiscal responsibility would reassure Alaskans that public money isn’t being overspent, and it would also greatly reduce the dickering and horse-trading that occurs as the legislative session winds down. Then we could refill our savings accounts and inflation-proof the Permanent Fund for future generations.

So why haven’t these constitutional solutions been put before Alaska voters? Ask a half-dozen lawmakers and you might get a half-dozen different excuses, but the buck stops at Dunleavy’s desk. The governor has affected a nonchalant air in discussing the state’s fiscal plight, claiming that the ball is in the Legislature’s court. But that attitude ignores the reality that the primary reason no solution to the problem has moved forward has been the opposition of a substantial fraction of Dunleavy-allied legislators who oppose any fiscal plan that could reduce the size of the PFD from its unsustainable 1982 formula.

Dunleavy has a choice to make: He can be the governor who spent eight years blaming others while the ship of state foundered on the fiscal shoals, or he can spend the next two years leading from the front. This means introducing legislation this year to amend the state constitution to allow the Permanent Fund accounts to be combined into one (or supporting Rep. Cliff Groh’s already-introduced legislation to accomplish that end), and limiting what the Legislature can spend in a given year. Once that legislation is introduced, he should dedicate the rest of his time in office to working the phones and hallways in Juneau to build consensus and get those amendments sent to the people of Alaska for approval. That would be a legacy any governor would be proud of.