Gov. Bill Walker’s administration is preparing to roll out the most radical change to the state’s annual budgeting process since the creation of the Alaska Permanent Fund in 1976.
At noon Wednesday in Centennial Hall, lawmakers were briefed on a budget plan that redirects almost all of the state’s oil revenue to the Permanent Fund, in effect turning it into a money factory that would generate about $3.3 billion per year.
The plan also promises to radically change the way the annual Permanent Fund Dividend is paid.
“It is now clear that, barring a change in the economic environment, that our financial wealth assets will generate substantially more income than petroleum revenues in the future,” said Attorney General Craig Richards on Wednesday morning.
Getting legislative approval of the proposal and implementing it aren’t expected to be easy or quick. “This is going to roll into one hellacious political conversation,” said Rep. Mike Hawker, R-Anchorage, after being briefed on the proposal by Richards.
The details of the idea are complicated, but in broad outline, it isn’t dissimilar to the system of reservoirs that feed Juneau’s drinking water and hydroelectric power needs.
Under the proposal, most of Alaska’s oil and gas revenue would flow directly into the Permanent Fund like rain falling into a reservoir. A portion of the fund’s annual growth — which now comes more from investments than oil — would flow downhill to the fund’s earnings reserve, a separate reservoir.
That reservoir already exists, and it can be accessed by a simple majority vote of the Alaska Legislature — but it’s rarely touched because most Alaskans consider the reserve part of the Permanent Fund proper.
Under the proposal, there would be an annual flow of about $3.3 billion from the reserve to the state’s general fund, which pays for state services.
If the stock market drops — as it did during the Great Recession — and the Permanent Fund loses money as it did in 2008 (it lost 18 percent of its value), the earnings reserve acts as a buffer and allows the state to keep collecting $3.3 billion a year.
If the Permanent Fund averages 6.7 percent growth — according to the fund’s latest annual report, it has averaged 6.4 percent over the past 10 years — the arrangement could be kept up forever, Richards said.
Seeing the need
The goal behind the proposal, Richards said, is to iron out the up-and-down swings of oil prices and give the state a steady source of income. That would reduce the explosion of government growth during fat oil years and reduce the need for cuts when times are tough.
“What are you doing if you’re jerking your economy around like a see-saw?” he asked. “I believe, and I think others will once they begin to think about it, is that this is a powerful idea for the Alaska economy itself.”
With the state facing approximately a $4 billion gap between revenue and expenses, lawmakers are considering things like income or sales taxes (as well as steep service cuts) to make ends meet before the state’s savings accounts run out in as little as two years from now.
“When I go back home, people say, ‘Oh yeah, I’m ready for an income tax.’ I don’t think they are,” said Sen. Gary Stevens, R-Kodiak.
Rep. Cathy Muñoz, R-Juneau, said she thinks “it’s very important that we look to stabilize our budgets over time and that we look for sustainability. … I’m encouraged that they’re kind of looking outside the box.”
As for the Permanent Fund Dividend, the plan would tie Alaskans’ annual checks directly to oil and gas revenue, instead of to investment income.
Currently, dividends are based on a five-year average of the fund’s performance, not of oil prices. That’s why this year’s dividend was among the highest on record (once adjusted for inflation), even though oil prices have plummeted.
Sen. Anna MacKinnon, R-Anchorage and the Senate Finance Committee chairwoman, said that’s created a disconnect in the public mind. “In that, I mean it seemed inconsistent when we put out a $2,000 Permanent Fund check and we’re facing a $4 billion deficit,” she said. “The people of Alaska are confused.”
According to a flow chart provided by the governor’s office, dividends under the new plan would come from half the oil and gas royalties collected by the state each year.
“We’re changing the nature of how the dividend is calculated — we’re proposing a change — to how the dividend is calculated, and we’re going from one that is based on stock market returns to one that is based on oil royalty returns,” Richards said.
He said Alaskans could expect dividends to be about $1,000 per year under that scenario and current production figures.
“But if we get a gasline, if SB21 works and we get a rise in oil production, or if commodity prices turn around and you get an increase, well, the royalty dividend payout will be higher,” Richards said.
“If production is lower and prices are low, and you don’t get a gas pipeline, then royalty payments will be lower,” Richards said.
If the trans-Alaska oil pipeline shuts down and there’s still no gas pipeline — Richards said he doesn’t think that scenario is likely — the dividend would all but disappear.
An idea from Saudi Arabia
In April, a fellow at the Harvard Kennedy School of Business presented a remarkable proposal: A way to solve Saudi Arabia’s multibillion-dollar budget gap.
Khalid A. Alsweilem is no ordinary scholar. The former head of the Saudi Arabia Monetary Agency (that nation’s equivalent to the Alaska Permanent Fund Corp.), he proposed an idea for Saudi Arabia that looks remarkably like the notion proposed by Gov. Walker’s administration.
“The most important overarching purpose of these reforms would be to decouple spending from volatile and uncertain oil revenues, which is the country’s increasingly dominant source of public revenue,” Alsweilem’s report concludes.
In June, Richards — who cut his teeth in finance law before becoming attorney general — was named to a working group formed by the governor’s office to discuss proposals to help the state make expenses and revenue meet.
The group soon found Alsweilem’s proposal and invited members of his team to Alaska. The proposal was adapted for Alaska and refined into the idea unveiled Wednesday. In some ways, it’s still being refined, Richards said.
In some ways, Alaska has already implemented portions of Alsweilem’s proposal, according to a description published by Harvard. The Harvard proposal calls for mandated oil contributions to a “savings fund” (in Alaska, the Permanent Fund) whose investment revenue would go to a “stabilization fund” that would act like the Permanent Fund’s earnings reserve.
The biggest difference between the two are the amounts involved. The savings fund is envisioned to hold $500 billion. The Permanent Fund, as of Tuesday, was worth $53 billion.
Balancing the budget
Alaska’s proposal won’t completely fill the state’s gap between revenue and expenses. According to an analysis provided by the state, the Permanent Fund would have to have “well over $100 billion to generate sufficient revenues to fully fund the state budget and allow for dividends at the current rate.”
Grace Jang, a spokeswoman for Gov. Walker, said it’s important to remember that using the Permanent Fund “is the major underpinning of the plan” to balance the state budget. “We’re not saying this is the plan,” she said.
Either more cuts or additional revenue — such as a sales tax or income tax — would still be needed to balance the budget without using savings.
Sen. Kevin Meyer, R-Anchorage and the Senate President, said the next step will be to see the governor’s complete budget plan. “We know this is a piece of it,” he said. “The devil’s in the details, right?”