Open letter to Legislature: 2017 is last chance for hard choices
Dear Alaska Legislators,
We know each of you wants to do what is best for our state's long-term future. We all want jobs for Alaskans, a healthy economy, a stable state fiscal structure that helps attracts private investment to Alaska, and quality education and public services to serve the needs of our residents.
We are encouraged when we hear legislators talk about Alaska's long-term economic health. But we are discouraged that we are running out of time to accomplish the one goal that must underpin all the others — a stable fiscal structure for our state treasury.
We write you today to once again offer our encouragement, with an emphasis on the urgency of the situation as you prepare for the 2017 legislative session.
We are sharing this with the public because Alaskans need to understand this is a critical time for our state. We've grown wealthy from oil development, and we all hope for decades more of oil and gas production in Alaska.
But the time has come for a diversified revenue stream into the state treasury, and Alaskans must support their legislators in making the hard decisions ahead.
The facts are clear:
• The fiscal 2017 state unrestricted general fund budget is about $4.36 billion.
• Even with higher oil prices of recent weeks, it looks like the FY17 draw on savings to cover the budget will total close to $2.92 billion.
• With that math, the state expects to start the fiscal year 2018 on July 1, 2017, with perhaps $3.7 billion remaining in the Constitutional Budget Reserve.
• Prudent fiscal and cash management requires we keep at least $2 billion in the budget reserve, which means Alaska must make changes to its fiscal structure during the 2017 legislative session.
• If the budget reserve disappears as an option for covering the state's needs, the Permanent Fund earnings reserve becomes the only alternative.
As of Nov. 30, 2016, at approximately $8.8 billion in realized gains, that reserve account looks healthy but is always susceptible to investment volatility, and any unplanned withdrawals could jeopardize the Permanent Fund dividend.
It appears to many Alaskans that nibbling at the edges of the problem in the 2017 legislative session and drawing $2 billion to $3 billion from the budget reserve for one more year would bring the state perilously close to writing unplanned checks out of the Permanent Fund.
It's time for a managed answer, not a default answer, and we urge you to take action and assure you we will support you in that effort.
The options for a long-term fiscal plan are the same ones Alaska has been looking in the past several years. We see four major pieces to any solution:
• An orderly, responsible, managed use of Permanent Fund earnings, including a change in how the dividends are calculated. We cannot spend the same dollar twice, which means a dollar that goes to schools, roads, troopers, the courts and other public services cannot also go to dividends. Legislators are fully aware that choices must be made. If, for example, the Legislature adopted a percent-of-market-value approach to limiting the annual withdrawal from the Permanent Fund, and if that were set at 4.5 percent of the fund's average market value looking back five years, the maximum draw for fiscal 2018 would be about $2.43 billion. And if, for example, you wanted to maintain a $1,000-per-person dividend from that total, that would leave about $1.73 billion for public services.
• An orderly, responsible, managed examination of state spending and potential for further budget reductions in the range of $250 million to $500 million implemented over two to three years to lessen harm to the economy and allow the public, municipalities and businesses time to prepare for reduced services.
• A responsible broad-based tax, such as a modest personal income tax on Alaska's higher income earners and/or a sales tax that would accomplish several goals: 1) Give all Alaskans a personal stake in how state money is spent; 2) Collect income from nonresidents who come to Alaska to work, and go home to spend their money; and 3) Help diversify state revenues from our total dependence on natural resource prices and investment earnings.
• Excise and industry-specific taxes of perhaps $100 million a year on motor fuels, alcohol, tobacco, fisheries and mining.
Here is the math for the current set of options:
$4.36 billion fiscal 2018 state unrestricted general fund budget using fiscal 2017 as the base.
• $1.59 billion in general fund revenues (assuming today's improved oil prices remain)
• $250 million to $500 million in additional budget cuts, including re-examining oil and gas tax credit policy
• $1.73 billion in Permanent Fund earnings, after paying a $1,000 dividend
• $500 million in new revenues (income and/or sales tax, higher excise taxes and industry taxes, including expansion of the corporate income tax to cover LLCs and S Corps.)
That still leaves a $40 million to $290 million shortfall, which we could work to close over the next few years.
By taking action on the major pieces above, we gain some time. Meanwhile, we should not forget that the state needs to deal with the hundreds of millions of dollars we owe to companies for unpaid oil and gas tax credits. We need to resolve that debt if we're to truly solve our fiscal problems.
And we need to remember that, because it will take time to implement any new taxes and to collect on other changes in Alaska's tax structure, we should expect a larger drawdown on our budget reserves in fiscal 2018 as the changes take effect.
The budget reserve, however, can only afford a limited future drawdown, so we need to make the big decisions in 2017 that will extend the life of the reserve to give us the time to put our state on a path to fiscal stability.
There isn't enough time for new oil or triple-digit prices to save us. That's wishful thinking, and we need responsible decisions based on today's reality.
We support you in the challenges ahead, and urge you to make those decisions in 2017. Anything else puts the future of our state at risk.
Ed Rasmuson is a retired banker. Bill Corbus is a former commissioner of the Alaska Department of Revenue. Jeff Cook is an energy consultant. Gail Schubert is CEO of Bering Straits Native Corp. Mike Navarre is mayor of the Kenai Peninsula Borough.