Alaska plots its post-oil financial future

For 45 years, Alaska has lived a charmed fiscal life. It has reaped billions in taxes from oil and gas companies, revenue it uses to shift the burden for running the government away from residents who, as a result, enjoy some of the lowest tax rates in America.

The Alaska Permanent Fund, first established in 1976, has earned so much from those oil and gas companies drilling on state lands that it has been able to distribute a regular dividend to every man, woman and child in the state, a quasi-universal basic income program that has itself become a major driver of the state’s economy.

But oil and gas production is slowing, both for economic and political reasons. Some companies are moving away from Alaska’s oil fields, and climate change threatens islands and seaside villages across the state.

Alaska lawmakers have had to rely on a budget reserve fund to plug deficits in recent years.

In short, the gravy train that has allowed Alaska to stockpile more money than any other state is slowing, inexorably, to a halt.

Alaska’s changing financial fortunes have forced a reckoning in Juneau, one that has pitted the state’s myriad political factions — alliances far more complicated than the typical partisan divides found in what residents call the Outside — against each other. Legislators and Gov. Mike Dunleavy (R) are now considering the state’s first fiscal plan, one that will have a short-term impact on how much money each resident receives from the Permanent Fund Dividend this year and a much longer-term effect on fiscal health.

“Everyone agrees we can’t continue what we’re doing, because it’s going to lead to a huge problem,” Dunleavy told The Hill in a series of interviews this week. “It’s about Alaska’s future as a viable, self-sustaining industry.”

The fiscal plan would amend the state constitution to restructure the permanent fund, limit the amount of money available for government spending and guarantee an annual dividend for residents at a set formula.

The proposal has bumped along uncertainly this year, as legislators and Dunleavy clashed over the size of the annual dividend and the contours of the plan itself. Legislators adjourned a third special session of the year this week after agreeing to a $1,100 dividend, which Dunleavy said he would approve, though he favors one more than twice as large.

Dunleavy has said he will call legislators into a fourth special session, beginning Oct. 1, to complete work on the longer-term plan.

State Sen. Tom Begich (D), the minority leader, said in an interview this week that legislators are considering four main elements to put Alaska on a path to sustainable fiscal health: changing the formula that decides the annual dividend; codifying the division of permanent fund earnings between residents, for a dividend, and government, for annual revenues; capping the rate at which government spending can rise; and new revenues to fill in gaps when there is a budget deficit.

“A lot of us are looking at the long-term inevitability of oil and gas not being a future commodity you can count on,” Begich said. “Alaska has to determine how it will fiscally survive in a new world when its primary commodity is no longer in demand.”

The permanent fund is a sacrosanct part of residents’ connection to the land and the natural resources that live beneath it. But today, the fund’s main source of growth isn’t tax revenue from oil and gas companies, it is the returns from a stock market that has soared in recent years. The market value of the fund stands at $81.1 billion, according to the Alaska Permanent Fund Corporation, up from $65 billion last year and $30 billion in 2009, at the depths of the last recession.

“The majority of Alaskans view it as a function of their Alaska life. It is baked into their Alaska life at this point,” said Matt Larkin, owner of Dittman Research, the state’s most prominent polling firm. “It is viewed by many of these people to not be government money.”

But beginning in 2017, the dividend became mired in provincial politics. That year, then-Gov. Bill Walker, an independent, vetoed its size, a decision upheld by the state Supreme Court. Ever since that decision, legislators have debated the size of a dividend that Alaskans once took for granted.

On the campaign trail, candidates running to represent their constituents in Juneau almost universally promise to dole out big dividend checks. Once they win office, though, those best-laid plans tend to break down.

“Everyone campaigns for the dividend, and that raises the public’s anticipation and expectation that there’s going to be some sort of consensus,” said Tuckerman Babcock, who served as Dunleavy’s chief of staff after leading the Alaska Republican Party for two years. “Then the statutory dividend fails on a very close vote.”

The coalitions that form around the size of the dividend, and the structure of the permanent fiscal plan, are as convoluted as the party politics of the state legislature, where Republicans, Democrats and independents have lined up for and against their parties in unexpected ways in recent years.

The state House of Representatives has been led by a coalition of Democrats and Republicans over the last several sessions, often in shifting alliances; Republicans joined by a few Democrats controlled legislative sessions in 2015 and 2016; Democrats controlled the House with the help of independents and between two and eight Republicans beginning in 2017.

Today, a Republican House speaker presides over a majority caucus that includes the entire Democratic caucus and four independents — but not before the body went a month without being able to agree on that speaker.

The dividend debate is similarly, and confusingly, riven. Liberal Democrats and conservative Republicans tend to support a higher dividend — Democrats because of the benefits to those with lower incomes, Republicans because they see it as the people’s money. Moderates on both sides back smaller dividends, with leftover money earmarked for government programs.

Dunleavy counts himself on the conservative side of that spectrum, an ally of what he calls the “burn barrel Republicans” who are lower on the economic scale and want government out of their lives, rather than the more established Republicans who might be members of the Chamber of Commerce. He wants the fiscal plan to include what he calls a 50-50 plan, in which half of the annual revenue from the permanent fund’s earnings would be earmarked for a dividend and half for state spending.

“We’ve got to cap the ability of government to take unlimited amounts of money, and we want to do that by coming up with a 50-50 concept that would be constitutionalized,” he told The Hill. “The less they get their hands on, it slows the size of growth of government.”

As Alaska charts a future in which its holy grail of severance tax revenue begins to run dry, Dunleavy may find new allies in the legislature.

“The future is changing,” Begich said. “If we can maximize the permanent fund, ensure minimal rev and a modest spending cap while at the same time providing surety to Alaskans that they’ll have this connection to the fund, then we’re there.”