Jan. 7—In just over a week, the Alaska Legislature will gavel into session. Provided the State House can do a better job organizing a majority caucus than the U.S. House (don't bet on it), legislators will get down to business — which, for much of the session, will center around the state budget. It's a process that's been derailed in the past decade by paralysis over the Permanent Fund dividend, as lawmakers and even Gov. Mike Dunleavy have come to realize that our oil revenue gravy train is no longer sufficient to provide a full slate of state services and also pay a PFD via the 1982 formula. Thus, the PFD amount becomes an annual battle that stymies progress on virtually everything else, to the detriment of our savings accounts and our state's future. And despite the good intentions of many lawmakers, plans to address the structural budget problem have gone over like a lead balloon.
The result? Years like 2022, when the state made rosy projections based on overinflated oil prices and legislators passed the second-largest budget in state history (the largest, before adjusting for inflation), only for prices to retreat and once again leave us with a deficit.
If we want to escape this PFD-fueled paralysis, we first need a mechanism to ensure legislators won't overspend in boom years, nor let the dividend cannibalize essential services when oil prices go bust. What we need as a first step toward a budget that works for Alaska's future is a spending cap.
The primary virtue of a spending cap is that it provides needed certainty to the many Alaskans who don't trust that legislators would wisely spend the money generated by a permanent alteration of the PFD formula. Their skepticism is well-founded. We need only look back to 2022 to see what happens under our current, guardrail-free system when oil prices give legislators the option to both fully fund government and pump the PFD up to unsustainable levels in a bid to secure their own reelection: They do it. A spending cap that allows for a reasonable budget — but not the wild binges Alaskans have seen to date — would smooth out that process, letting us save funds in boom years that would carry us through harder times. It would also allow us to grow the Permanent Fund to a level where it could sustainably take over for oil tax revenue in perpetuity as Alaska's major source of funds for services. It's not hard to project that after only a few years under a spending cap, the PFD could quickly rise back to current levels.
Another practical benefit of a spending cap is that it will make us confront an unpleasant reality of our state's budget: Every dollar spent on PFDs is one that can't be spent on essential services such as public safety, education and transportation — and vice versa. Because lawmakers have been all too willing to decouple the amount we spend on services and PFDs from the revenue we bring in each year, many Alaskans have been seduced by the false promise that we can have our cake and eat it, too. We've been told that we can have jumbo PFDs and all the services we've come to expect with no compromises, and that notion has corrupted our politics to the point that many Alaskans refuse to accept that it is, in fact, fiction. The reality is that the oil price fairy is fickle and can't be the basis for rational fiscal policy.
Some details would need to be worked out concerning the mechanism of the cap, of course. The past year has taught us the necessity of accounting for inflation — and the baseline amount of the cap and the process by which it's adjusted each successive year — would need to be hammered out in legislative committees. That's the sort of actuarial math that the Legislative Finance Division and the state Department of Revenue would no doubt be glad to help lawmakers with — and they may already have some of the numbers on hand, given that Dunleavy floated a spending cap amendment himself last year.
Ultimately, a spending cap will have to be enshrined in the Alaska Constitution to keep lawmakers from disregarding it. But given the difficulty of passing a constitutional amendment in a single year, as well as the (usually beneficial) tendency of Alaskans to be skeptical of big changes to our state's founding document, it makes more sense to work out the cap this year as a statute, which would provide a framework that could more easily be tweaked if necessary. It would also provide a trial period, so to speak, during which Alaskans could assess the merits of the cap before deciding to commit it to the Alaska Constitution a year or two down the road. Once the cap is functional and fully baked, Alaskans would certainly adopt it into the Constitution.
Trying to craft a comprehensive fiscal plan that includes the PFD, reverse sweep and other esoteric elements has proven impossible, and rightly so. Before any of those elements are tackled, the first step must be a real and rational spending cap. Doing so would show the people of Alaska that the Legislature is willing to tighten its belt alongside them, keep them from continually bloating the budget when oil prices temporarily rise, and it would pave the way for a more full-featured long-term plan to be developed in future years.
Legislators won't fix the budget mess this year unless they're a far more productive group than those who have filled the Capitol Building for the past decade. But they can make a big step forward on it by passing a reasonable spending cap that will provide stability while also underscoring the trade-offs that come with drawing up budgets in the real world.