Time to complete Gov. Hammond’s vision

The following ran as a My Turn piece in both the online and print editions of the Juneau Empire under the headline “Time to complete Governor Hammond’s vision” (Tuesday, May 12, 2015), as a Community Perspective piece in both the online and print editions of the Fairbanks News-Miner under the same headline (Thursday, May 21, 2015), and as a Commentary in both the online (Friday, May 22, 2015) and print (Saturday, May 23, 2015) editions of the Alaska Dispatch News under the headline “It’s time to use Permanent Fund earnings for government services.”

Former Governor Jay Hammond said this when later describing the reasons he and others created the Permanent Fund:  “I wanted to transform oil wells pumping oil for a finite period into money wells pumping money for infinity.”  Once the money wells were pumping, “[e]ach year one-half of the account’s earnings would be dispersed among Alaska residents …. The other half of the earnings could be used for essential government services.”

The two-sentence constitutional provision establishing the Permanent Fund (Art. 9, Section 15) implements that vision.  The first sentence locks away the “the principal” of the Permanent Fund, creating the “money wells pumping money for infinity.”

The second sentence provides the vehicle for using the resulting “production,” by directing that “[a]ll income from the permanent fund shall be deposited in the general fund unless otherwise provided by law.” Four years after voters established the Permanent Fund the legislature solidified the direction, providing that that the income stream is to be used for three purposes:  to pay dividends, to protect the principal from inflation and to fund a reserve account, available when needed to pay for essential government services.

The earnings reserve never has been used regularly for the third purpose, but as oil prices – and thus, the state’s oil revenues – reset long-term to new, lower levels the time has come for Alaska fully to implement Governor Hammond’s vision.

During the current fiscal year Alaska general fund spending will total roughly $6.2 billion.  In the budget currently sitting on Governor Walker’s desk, this year the legislature proposes to spend roughly $5.3 billion.

But traditional revenues for this year – mostly from oil – only are anticipated to total around $2.2 billion, and about the same next year.  At what some think are overly optimistic price forecast levels going forward, state revenues from traditional sources are projected to produce only around $3.2 billion in the two years beyond that.

Even reducing other spending to absolute minimal levels, by some calculations the state would be required to lay off roughly 80% of its employees, and cut state funding to schools by an amount which would result in the same reductions among teachers, in order balance the budget at those levels.

Using the income from the Permanent Fund as envisioned by Governor Hammond and the Constitution is not a complete panacea for Alaska’s current fiscal situation.  Some additional reductions in spending are required as well in order for Alaska to live within its means.

But in a recent piece Dr. Scott Goldsmith of the University of Alaska – Anchorage’s Institute of Social and Economic Research (ISER) calculated that – after preserving both the dividend and inflation proofing — the state could sustain long-term spending levels in the range of $4.5 billion, growing thereafter to keep pace with population and inflation, by supplementing the state’s traditional revenue sources with the third leg of the income stream from the Permanent Fund.

Some argue that government spending levels instead should be supplemented by implementing new taxes or recapturing a portion of the Permanent Fund dividend from individuals.  But raising even $500 million in new state revenue would require collecting on average roughly $700 annually from every Alaska man, woman and child, or $2,800 per family of four.

And none of those advocating this approach have even remotely considered the potential adverse consequences of taking money out of the state’s private economy in order to bolster government spending.  They could be serious.  In a 2010 study, for example, ISER said that some such steps could “generate less employment and increase income inequality” within the state.

Still others argue that using the third leg of the income stream from the Permanent Fund, as clearly envisioned by Governor Hammond and authorized by the Constitution, is unacceptable because it would reduce the level of the Permanent Fund Dividend.   In its most recent paper on the subject, however, ISER already has identified how to avoid that.

In a presentation earlier this year Governor Walker told Wall Street that Alaska was prepared to use the earnings reserve when necessary to maintain state government services.

Beginning now, it is time for the legislature use that option as part of the solution to Alaska’s fiscal situation.

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Brad Keithley is president of Keithley Consulting, LLC, an Alaska-based and focused oil, gas and fiscal policy consultancy, and founder of Alaskans for a Sustainable Budget.