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Section 1. Proposal  

 

The state's present fiscal system

  • Most of the money derived by the state from the sale and related taxation of its oil and gas is treated as revenue available for general purpose spending. [1]

  • Since that money, which is a major part of the state's revenue, fluctuates uncontrollably, revenue available for spending can vary considerably from one period to the next.

  • During a period in which revenue is inadequate, the state faces a “fiscal gap”, the difference between a prevailing spending level and anticipated revenue.

  • Unless there are sufficient reserves for bridging it, the gap must be closed either by increasing revenue or decreasing spending.  

 

 

 

 

 

 

A proposed fiscal system

  • Designed to make oil and gas money sustainable[2]

    • All of the states oil and gas royalties and production taxes would go into the Alaska Permanent Fund.

    • Remaining reserves would be transferred to the Alaska Permanent Fund.

    • The fund would be invested, with emphasis on preservation of capital.

    • Sustainable revenue would be withdrawn from the fund each year. [3] 

  • But not designed to make revenue adequate[4]

    • No practical system can be designed to make revenue adequate. [5]  

 

 

 

 

The effect of the proposed system

With revenue that is adequate and sustainable, the state would be fiscally viable. 

 

An incidental advantage

When creating a budget for the upcoming fiscal year, the Legislature would know exactly how much investment revenue would be available in that year. [6]  

 

Method of adoption

The proposed system requires constitutional changes.

 

Obstacle

It's the temptation to keep on spending the state’s wealth at an unsustainable rate.

 

 

  


[1] It goes into the General Fund. Almost all of the rest of the oil and gas money is classified as capital and goes into the Alaska Permanent Fund.   (BACK)
[2] Sustainable revenue doesn't decrease, in real (inflation-adjusted) terms, from one year to the next.  (BACK)
[3] An achievable rate of total return on reasonably conservative investment is 8% a year, and a probable rate of inflation is 3% a year. The rate of sustainable withdrawal is obtained by dividing the difference between those two rates, 5% (.05), which is the rate of real return, by one plus the rate of total return (1.08). The result, rounded, is .0460 (4.60%). To determine the amount that can be withdrawn from the fund each year, that rate, 4.60%, would be multiplied by the fund's nominal market value (for the purpose of withdrawal that value would be the fund's average year-end nominal market value over a period of six preceding fiscal years). However, during a transitional period of ten years, withdrawals would be at a gradually (and geometrically) decreasing rate that would be unsustainable until it gets down to the sustainable level in the tenth year.  (BACK)
[4] Revenue is adequate if it can fund the essential functions of government.  (BACK)
[5] Although no system can ensure that there would be enough revenue every year to fund a budget, the Legislature can help to make it adequate by refraining from spending money on functions that aren't essential. The investment revenue and miscellaneous non-tax revenue would, and should, be the first revenue to be appropriated. If it weren't enough to fully fund the budget, it would be supplemented by tax revenue. But taxation at that point, especially broad taxation of individuals, could create enough adverse public opinion to persuade the Legislature to confine its spending to essential functions.  (BACK)
[6] Because the amount that would be available from the endowment in that fiscal year is based on the endowment's average value during a six-year period that ends before the Legislature convenes.  (BACK)

 

 

 

 

Introduction   ·   Proposal   ·   Constitution

Present System    ·    Proposed System (Endowment)    ·    Proposed System (Transition) 

Present System Notes · Proposed System (Endowment) Notes · Proposed System (Transition) Notes