Brennan: They’re just being careful

By Tom Brennan |

It’s easy to think that our legislators are blowing smoke about Alaska’s budget problem, but actually they are just being careful.

There is plenty of money available to deal with this year’s budget crunch, even if they are dragging their feet on reducing state spending. Things are moving slowly because decisions could be made this year — if the decisions go the wrong way — that would mess up Alaska’s future.

From afar, and Anchorage is a far piece from Juneau in more ways than one, it appears that the Legislature is hesitant to dip into the Earnings Reserve Account, which was set up for that purpose. Actually, I’m told, both the House and the Senate are agreed that it’s time to tap the Earnings Reserve. The devil is in the details.

Until now the primary source of money for state spending has largely been oil revenues and filling in gaps by dipping into the Constitutional Budget Reserve. That fund was built up by throwing unneeded cash into an account when oil prices and production were both high and the state had more money than required for the budget.

But those gravy days are over and deposits in recent years have been minimal. At one time the CBR held more than $10 billion and the Legislature was drawing $2 billion to $2.5 billion a year to balance its ledgers. But, as of March 31, the total in the account was $2.62 billion.

The big tappable account remaining is the Earnings Reserve Account, where the Alaska Permanent Fund deposits a portion of earnings from the corpus of the fund itself. Last June 30, the fund’s total balance was $59.8 billion, including $47 billion in the principal and $12.8 billion in the Earnings Reserve Account, all of which is generating additional earnings. The fund’s investments have done well since June 30 and the total is now well over $60 billion.

The Permanent Fund directors have already announced plans to move $4.4 billion into the ERA this year. That will give it a hefty total on the order of $17 billion.

Until now the only sizable withdrawals from the Earnings Reserve have been to pay those lovely dividend checks we get in the fall. The state has a formula for determining the size of those dividends, but following the formula would have provided checks large enough to give our leaders dizzy spells. So the payouts have been reduced. This year’s formula would have meant $2,700 checks this fall but they will be $1,600 to avoid digging too deeply into our savings.

And that is a concern this year because our state leaders are pretty much in agreement that the time has come to use a portion of the Earnings Reserve to cover the budget. We have plenty of money to meet state needs for the time being. But even though we have a lot of money in savings, that could disappear in too few years if our leaders make bad decisions.

Both chambers of the Legislature are pretty much in agreement that it is time to dip into the Earnings Reserve. They are not, however, agreed on how to go about it. The big need is to adopt a formula that will begin ERA drawdowns at a sustainable level. And even though the Legislature could adopt a formula by passing a law, the formula could be ignored and unsustainable draws be made unless the formula is spelled out in an amendment to the Alaska Constitution.

Proposals are in the works to put an amendment before the voters that would limit such draws to 5 to 5 1/4 percent of the total value of the Permanent Fund each year. And naturally a lot of negotiating is going on, with pet projects gumming up the discussions. How it will all work out is unclear at the moment. But the good news is that we seem headed for a solution.

The most important caveat is that under no circumstances should the Legislature increase oil taxes. That would undermine industry confidence in Alaska as a business partner and become a dangerous negative factor in future investment decisions.

With huge industry spending hanging in the balance, including eventually investments in Arctic National Wildlife Refuge leases, Alaska’s credibility as a reliable business partner is very much on the line.

So no oil tax increases, please.

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