Gov. Bill Walker’s proposal to transform Alaska’s capital structure and the way state budgets are funded has finally focused much needed attention on the “third rail” of Alaska politics — the Permanent Fund. Predictably, controversy surrounding it erupted immediately although, interestingly enough, supporters and detractors do not fall conveniently into opposing political camps.
While many of the details of the proposal need to be fleshed out — details which will decide whether the plan sinks or swims — there is a great deal of merit to the concept. The Walker administration deserves credit for its courage in bringing the idea forward. This is not a radical idea — many foreign countries with economies like Alaska have sovereign wealth models that are similar to this proposal — but this would be the first time an American state has implemented such a plan.
The proposal calls for depositing a portion or all of Alaska’s oil tax and royalty revenues into the Permanent Fund and receiving an annual payment in the neighborhood of $3.3 billion that would be used to partially fund government. Allowances would be made for continuing the Permanent Fund Dividend, although it would initially be on a reduced basis with future changes tied to increases in resource revenues.
One of the details to be worked out and incorporated into the plan would be a formula for determining the dividend and some type of “spending collars” that would provide a floor and ceiling for payments to the government. According to current models, this can be accomplished while still inflation-proofing and preserving the principal of the fund.
The advantages of this type of structure are considerable. First, it removes the volatility currently embedded in the state budget caused by fluctuating oil prices and provides a predictable source of funding for government operations. Second, it places that volatility where it can be absorbed in the Permanent Fund, allowing the state to ride through the inevitable down cycles experienced in a resource-based economy.
Opponents argue this proposal is regressive and should not be considered in place of budget cuts or higher taxes on corporations and individuals. However, it is clear that those measures are also in the mix, as even this proposed sovereign wealth plan will not close the fiscal gap by itself.
Where I do believe opponents have a point is how best to balance the role the Permanent Fund plays in closing the fiscal gap and what role increased taxes and budget cuts should play. Whether intentional or not, the Walker Administration plan appears to calculate the maximum dollar amount that can be extracted from the Permanent Fund first and then makes up the rest with higher taxes and perhaps some minimal cuts. This is politically backwards, as Alaskans need to be assured that first all measures have been taken to reduce spending and raise reasonable taxes before arriving at what will be needed from the Permanent Fund. Otherwise, the plan will be perceived as a “raid” on the Permanent Fund and merely a tool to avoid making the harder choices concerning taxes and cuts.
Since the current proposal only envisions depositing oil tax and royalty revenues, I wonder why we should not also consider depositing all natural resource revenues to the Permanent Fund and make them available for dividends. While these revenues may now be very small in comparison to oil revenues, and some may not be as volatile as oil, if we truly want to be an “owner state” why not apply these same principles to all our resource-based industries like mining, fishing, and timber?
This proposal will generate a lot of discussion in the coming months. It deserves a fair hearing because it has the promise to help the state bridge the fiscal gap while providing much needed budget stability to necessary government operations. More importantly, it will reward Alaskans (substitute the word “owners”) for making conscious decisions to invest in and foster Alaska’s resources.
Currently, there is very little connection between the health of the state’s economy and the size of our Permanent Fund dividend. In fact, our actions and decisions regarding Alaska’s economy today have very little impact on the Permanent Fund dividend at all.
True owners must accept the risks that come with the rewards of ownership. Otherwise, are we truly owners or are we just receiving a welfare payment?