Alaska Gov. Jay Hammond and others knew all the way back in the ‘70s the dangers of relying financially on a finite resource. So when oil money began flowing into state coffers, Hammond and the legislature created in 1976 the Permanent Fund, which gets a share of the state’s oil revenues every year. The fund was seen as a source of income for when the oil ran out. Lawmakers can’t touch the initial investments -- just the earnings, which get divvied up and distributed annually to every resident who receives about $2,000.
“You have to remove the money,” Hammond said in 1980. “Put it behind a rope where you cannot utilize it for flamboyant expenditures.
Today Alaska still relies on oil revenues to fund most of its day-to-day operations, but nearly two years ago, oil prices began steadily declining. Since then, the state has withdrawn more than $6 billion from its substantial reserves and cut $1 billion in spending to close budget gaps. Last week, Moody’s Investors Service became the second ratings agency this year to strip Alaska of its AAA rating.
With no rebound in sight, Alaska is finally being forced to address its oil reliance. For the Last Frontier, that means the most significant financial overhaul since the Permanent Fund was established. Chiefly, current Gov. Bill Walker wants to reduce residents’ annual dividends and use the Permanent Fund’s investment earnings to supplement state spending. He also wants to create the state’s first income tax since 1980.
Halfway through the state's 90-day legislative session, lawmakers appear close to agreeing on state spending levels but have yet to consider any tax increases. A January Alaska Dispatch News poll found the majority of residents support Walker's proposal and lawmakers have acknowledged they will likely need to use Permanent Fund earnings for spending. Still, they have not addressed how the fund should be restructured.
On a recent trip to Washington, D.C., Walker spoke with Governing about his plans. The following interview has been edited for clarity and length.
Did you expect the financial situation would be this bad when you were campaigning in mid-2014?
It’s one of the reasons I ran. We had a $1.6 billion deficit when I ran for governor and I called it a crisis. Now we’re at $3.8 billion and I don’t call it a crisis and here’s why: We’re talking about it. We’re admitting it. Before, it was like, “What, there’s a deficit?” Nobody would talk about it.
You’re asking Alaskans to give up a lot between their annual dividends and an income tax.
There’s been a lot of focus on the income tax. We’re the only state in the nation without one and a statewide sales tax. Right now, we’re the lowest in the nation in our personal taxes. If all these proposals go through, we’ll still be the lowest in the nation.
Still, how are you selling this?
We were warned by Gov. Jay Hammond that this day would arrive. It arrived. We did nothing. We continued to build the size of government on a single commodity resource, a nonrenewable resource. [So we began to address this issue by reaching] out to Alaskans [via resident forums] and saying, “Look here’s our situation, here’s the problem. Here are some options on the solution.” We submitted a plan and I’ve repeatedly said our plan is written in pencil, not pen. If someone can improve upon it, we’ll celebrate that and talk about it.
Does your whole proposal need to be passed intact? Or can legislators pick and choose?
Maybe they can, but it’s going to be challenging to do that. In some respects, some parts of the package won’t support one without the other, so it’s kind of an "all lock arms and walk down the aisle together" thing.
Where are you getting the most pushback?
Some people call it too aggressive. Some people say I’m politically naïve. Well OK, maybe I am politically naïve. This is a new thing for me, I’m a private-sector guy. In the private sector, you don’t kick the can down the road waiting for the next election.
Even if it costs you your own re-election?
Absolutely. I would celebrate. If that’s the price of fixing Alaska, I would celebrate. It would be a win.