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5.4 A Generic Fiscal Plan for Alaska

First Presented to
House Finance Committee
Alaska State Legislature

by

Alaska Fiscal Policy Council
March 19, 2002
Anchorage, Alaska
and revised in response to changing conditions

 A. INTRODUCTION 

The absence of a plan for dealing with the fiscal gap is creating uncertainty within the economy, negatively impacting new investment.

This Generic Plan demonstrates both the nature of the state's fiscal problem and how it can be solved.

The fiscal gap--the difference between annual general fund expenditures and revenues--has varied from $0 million and $1 billion over the last decade. It will continue to increase as inflation and population growth drive up the cost of delivering public services and oil production, the primary source of state revenues, continues to decline. By the end of this decade the difference between a maintenance budget (growing with inflation and population) and revenues from current sources could reach $2 billion.

Any solution to the fiscal gap problem must include the 2 most powerful tools in the arsenal--broad based taxes and use of Permanent Fund earnings. These must be augmented by budget restraint, excise and other less powerful taxes, and judicious use of the Constitutional Budget Reserve.

Many versions of a plan could be crafted based on use of these tools. This Generic Plan could be put into place through legislation and other actions in a multitude of ways.

Our inability to forecast future oil prices, investment returns, economic development, public sector demands, inflation, and other factors that define the size of the fiscal gap require that our fiscal plan remain as flexible as possible.

Any solution to the fiscal gap problem must spread the burden of paying the costs of government fairly among all Alaskans.

Any method of solving the fiscal gap will take jobs out of the economy. Staging over several years the introduction of new revenue producing measures and budget reductions (including the PF dividend) will minimize the "drag" on the economy from closing the fiscal gap.

Implementation of a fiscal plan today maximizes future flexibility in the use of our fiscal tools while delay reduces our options.

To see the assumptions click here.

B. THE TARGET

When all its features are in place, the Generic Plan solves the fiscal gap problem through a combination of use of Permanent Fund earnings, revenues from broad based taxes, and revenues from other new sources. The legislature retains the authority to determine the levels of both traditional government expenditures and the dividend, and how they will be financed--how Permanent Fund earnings will be allocated and the mix of taxes and tax rates.

The Generic Plan closes the fiscal gap, spreads the burden fairly across Alaskans, retains maximum flexibility, and minimizes damage to the economy.

C. CRITERIA FOR A FISCAL PLAN

FAIR -- spread the burden fairly and equitably among Alaskans and across industries

SUSTAINABLE -- preserve financial assets and endowment funds (AHFC, etc.)

REALISTIC -- close the gap with real measures based on real assumptions

INCREMENTAL -- phase in measures gradually over several years

COMPLETE -- show the complete plan and timetable

STRATEGIC -- minimize short term economic impact and long term disincentives to development

FLEXIBLE-- maximize capability to adjust to changing circumstances

EFFICIENT-- minimize administrative cost

STABLE-- maximize revenue predictability

TRANSPARENT--keep it simple, logical, and politically possible

D. PLAN FEATURES

1. CONTINUE TO IMPOSE SPENDING DISCIPLINE

2. CONVERT PERMANENT FUND TO ENDOWMENT

3. USE ENDOWMENT EARNINGS TO FUND GOVERNMENT AND DIVIDEND

4. INTRODUCE EXCISE TAXES INCREMENTALLY

5. WORK TO GENERATE NEW REVENUE SOURCES FROM RESOURCE DEVELOPMENT

6. INTRODUCE BROAD BASED TAXES INCREMENTALLY AS NECESSARY

7. RETAIN THE CONSTITUTIONAL BUDGET RESERVE TO ACT AS RESIDUAL REVENUE "CUSHION"

E. IMPLEMENTATION

The Generic Plan would be fully in place for the FY 2006 Budget.The SPREADSHEET describes one possible way to implement the Generic Plan.

1. GENERAL FUND SPENDING

Spending grows no faster than inflation and population. A temporary spending cap that sunsets in 4 years could be imposed during the transition to the full implementation of the plan. After that time budget discipline would come from the annual determination, made by the legislature and administration, of the share of PF earnings used to fund the budget vs pay the dividend.

2.RESTRUCTURE THE PERMANENT FUND

Convert the PF to an Endowment by constitutional amendment. Draw 5% of the 5 year average value of the fund each year for spending.

3. USE OF ANNUAL PERMANENT FUND DRAW

By statute, split the annual draw between the dividend and general fund spending based upon current needs.

4. MISCELLANEOUS REVENUES

Other taxes and revenue generating measures that might be implemented include: increase in the alcohol or fuel tax, and imposition of a cruise ship or employment tax.

5. BROAD BASED TAXES

Impose broad based taxes if and when necessary to fund general fund spending. This could be done with a "trigger" which would put a tax into effect if and when the CBR fell below a predetermined floor.

6.BALANCING THE BUDGET WITH THE CBR

The final balancing of the budget would come from a draw on the Constitutional Budget Reserve.

7. THE EARNINGS RESERVE

The Earnings Reserve is rolled into the corpus of the Permanent Fund when th POMV is adopted.

8. THE PERMANENT FUND DIVIDEND

The existing dividend formula would remain in place until the PF is converted to an endowment. Then the legislature would determine the size of the dividend..

F. SENSITIVITY TO CHANGING CONDITIONS

NATURAL RESOURCE REVENUES-- Revenues from ANWR, a gas line, or another source would reduce the pressure on existing revenue sources in the long run.

HIGHER OIL REVENUES -- Higher oil revenues would reduce the draw from the Constitutional Budget Reserve which would permit tax rates to be lower, and/or dividends and expenditures to be higher.

LOWER OIL REVENUES -- The cushion of the Constitutional Budget Reserve would be used in the event of lower than anticipated revenues.

HIGHER GF SPENDING -- In the short term this would increase the draw from the CBR. In the long run it would reduce the dividend and increase the pressure for broad based taxes.

HIGHER INFLATION -- Higher inflation impacts both revenues and expenditures so its effect is minimal.

G. GRAPHICS

THE SIZE OF THE DEFICIT— The deficit is the difference between the general fund maintenance budget and general fund revenues from current sources. The deficit is increasing over time. Its exact size depends upon the size of the budget and revenues which fluctuate with the price of oil. 

BUDGET BALANCING MEASURES— Initially, the measures to close the fiscal gap are dominated by use of the CBR, but after the transition period the earnings of the Permanent Fund, broad-based taxes, other revenue measures, and budget restraint all play a role. 

REAL PER CAPITA SPENDING — Both general fund spending and the dividend fall in real dollars. 

YEAR END FINANCIAL ASSETS— The real value of state financial assets is sustained. 

JOB GROWTH — The "do nothing" scenario is to spend down the CBR and then cut the budget. 

FISCAL GAP

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