It's Crunch Time in the Land of Perpetual Deficits

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The year 2004 may go down in Alaska's history as the year the state's leaders faced up to its financial problems and made sweeping changes to solve them. Or it could be another year when Alaskans put off hard fiscal decisions yet again.

For 11 of the past 13 years, the state's government spent more than it took in, and Gov. Frank Murkowski's proposed 2005 budget projects a $400 million shortfall. For Alaska's 660,000 residents, that is a per-capita gap of more than $600 -- far higher than California's.

A reserve fund created in 1990 with more than $7 billion in one-time tax and royalties from oil and mining companies has subsidized previous deficits. There is less than $2 billion left in the Constitutional Budget Reserve, and the day of reckoning is approaching.

"The question we've been wrestling with for several years is what to do when that constitutional budget reserve runs out," said Scott Goldsmith, University of Alaska Anchorage economics professor and director of the school's Institute of Social and Economic Research.

Murkowski, a Republican, was elected in 2002 on an anti-tax ticket, but his efforts to close the state's fiscal gap during the 2003 legislative session included a proposal to impose a 3% sales tax -- a big step in a state without either a sales or income tax.

It proved to be too big a step for the Legislature, and the 2004 deficit was reduced to $400 million with a series of piecemeal tax hikes on things like car rentals and tires and politically unpopular cuts to aid for local governments and senior citizens.

As the time to close the fiscal gap dwindles, eyes have turned to one of the most unusual state financial institutions anywhere -- the Alaska Permanent Fund. The fund was created when the North Slope oil fields were opened in an effort to preserve some of that oil wealth for future generations.

The seed money and ensuing investments have given the fund more than $26 billion in assets.

The principal is sacrosanct, but the earnings are distributed to Alaskans every October in dividend checks -- more than $1,100 each in 2003.

"We actually pay you to live in this state," said Andrew Halcro, a former Republican legislator who argued for fiscal reform during his four years in the state House.

The fund's trustees -- with support from Murkowski -- have proposed a change in the fund's management.

"One of the main thrusts this year will be to get the Legislature to approve a measure on getting the Permanent Fund managed like an endowment fund," Goldsmith predicted.

That would shift the fund to a "percentage of market value" approach that spins off 5% of the fund every year, whether the fund's investments do well or poorly.

In the long run, the theory goes, the fund will continue to grow by meeting its 8% average annual target.

Along with the change to endowment philosophy, a separate idea is gaining ground -- using some of the money, which now goes entirely to state residents, to provide an income stream for state government to cure the fiscal gap.

Voters may very well face such a proposal in November, following Murkowski's appointment of a special committee to study that exact issue.

Changing the Permanent Fund may be easier said than done -- many of the people who would vote on it like the system just the way it is.

"It's an incredible sacred cow," Goldsmith said. "A lot of people have come to be dependent on the dividend -- retired people, low-income people, rural people, natives who have little cash income."

Halcro, the former legislator, said he had a hard time persuading others of the size of the problem.

"We're still handcuffed to two decades ago and people still fearful about moving forward," he said. "We don't realize the longer we wait more it gets worse."

He believes the fiscal gap problem is beginning to become more evident.

"My fear is that the realization won't sink in until it's too late."

With the oil boom, Alaska financed most of its capital needs on a pay-as-you-go basis. But the pressure of the fiscal gap was reflected in 2003 in the state's $461 million general obligation sale -- Alaska's first GOs in two decades.

John Manly, spokesman for Murkowski, said no further GO sales are in the wind.

But the governor's budget includes proposals to have state-owned enterprises issue bonds to generate cash for the state.

They include the Alaska Student Loan Corp.'s sale last month of $75 million in debt backed by a portfolio of student loans, as well as a $40 million lease-backed deal involving the sale of state buildings and other assets to the Alaska Housing Finance Corp., which would lease them back to the state.

It was unclear, before the session began, how much support either plan had in the Legislature.

Deven Mitchell, director of the Alaska Municipal Bond Bank, said that organization expects another year of strong issuance.

The bond bank, which issued about $65 million during fiscal 2003, had already exceeded that in the first six months of fiscal 2004, Mitchell said.

"Things have been busy for the bond bank in the first half of the fiscal year," he said. "I see continued heavy activity for the bond bank authority with a variety of capital projects being financed, primarily school construction for communities that want to take advantage of the state's school debt reimbursement program."

That program reimburses schools for 60% to 70% of qualified school debt service costs.

"Low rates, combined with state reductions in capital expenditures, have meant there have been more financings at the local level," he said.

The Alaska Housing Finance Corp. is, year in, year out, the state's biggest issuer, and is expected to keep up the pace.

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