This is the second segment of a commentary on Alaska’s fiscal crisis. The first part appeared in Wednesday’s Empire.
Gov. Bill Walker in a July 1, 2015 news release, states that total state spending for Fiscal Year 2016 is $12.1 billion, or $16,404 per capita. From the Office of Management and Budget website, FY16 Operating Budget totals show that state government is managed by 24,236 permanent employees. The cost of employee salaries, retirement and health care benefits, their travel costs and the costs for materials and equipment needed to perform their duties, totals $2.9 billion. State government also contracts out an additional $1.49 billion in government services to the private sector.
According to OMB documents, these 24,236 employees oversee $3.8 billion in grants and benefits to local communities and individuals, as well as $3.2 billion in “miscellaneous” expenditures through a host of government programs. In other words, roughly $4.5 billion in government-paid workers manage over $7 billion in government program expenses. Clearly, government workers and their services are closely intertwined.
Simply laying off government employees ignores the program responsibilities that they administer. Each program overseen by state government is the consequence of policies adopted by past Legislatures. In order to bring the state budget in line with our means, billions of dollars in state policies must eventually be re-examined to determine if we can actually afford them, given our new revenue reality. This daunting task will undoubtedly take years to accomplish; after-all, it took decades to create them.
Gov. Walker’s Sustainable Alaska Plan proposes to balance our budget in the short term by reinstating a state income tax, repurposing Alaska Permanent Fund earnings and by reducing Operating Budget expenditures. First, let’s acknowledge our gratitude for Gov. Walker’s bold and committed leadership in solving this fiscal crisis. His Office of Management and Budget website is a fountain of information about how our government works and what it costs. We are duly impressed with OMB’s modelling tool, which permits every Alaskan a chance to explore solutions to solving this problem. With this modelling tool, we can see that a state income tax (say at 15 percent of federal tax) and a state sales tax (say 3 percent) would generate about $1 billion in new revenue, falling far short of meeting the $3.5 billion deficit.
Experimenting with the model quickly leads us to the earnings of the Permanent Fund. The governor’s Sovereign Wealth Model is a plan to use the amazing earning power of the $50 billion Permanent Fund to pay for government expenditures. The only problem with this plan, as pointed out in part one of this piece, is that the Fund’s dividends will eventually disappear; that’s the tradeoff. Future Alaskans will not benefit the way that our generation has benefited from dividend distributions.
The Permanent Fund will no longer belong to the Alaskan people — it will belong to the government! This eventuality reverses Gov. Jay Hammond’s expressed purpose for the dividend program that future Alaskans benefit directly from the Fund’s earnings. Hammond stated emphatically, “These earnings belong to the people, not the government.”
So how can we solve our fiscal crisis and still preserve the original intent of the dividend program? The answer is to loan our dividends to state government.
We allow government to use the dividends long enough to permit the Legislature to re-evaluate state government policies, and modify them so that they fit within our ability to afford them using normal revenue-generating measures like a state income tax and a state sales tax.
Adopting Gov. Walker’s plan simply takes the Legislature off the hook. The Legislature won’t be pressured to re-evaluate adopted policies that are $3 billion beyond our means. Legislators won’t have to decide which programs are unjustifiable, unsustainable, or irrational given our “real” ability to pay for these programs. Alaska government now spends $16,400 per capita while other state governments on average spend $6,000 to $7,000 per capita (see numerous online sources: Kaiser Foundation, Tax Policy Center, taxfoundation.org, usgovernmentspending.com). It looks like our government is twice too big!
If the Legislature can’t complete their task in two years, then they come back to the people and ask for another two-year loan of our dividends. This process continues until the people reject further loans of Permanent Fund earnings. The important thing is that government will be under pressure to reduce the size of the budget until it is affordable, and of course, we can honor Gov. Hammond’s promise that the Permanent Fund belongs to the people, not the government.
• Alexander Hoke is a 40-year Alaska resident, currently engaged in property management and construction. His work experience also includes legislative policy analyst, president of a Rural Electric Utility (GHEA) and service as a City and Borough of Juneau Assemblyman.